Home > Uncategorized > In the wake of Brexit, will the EU finally turn away from austerity?

In the wake of Brexit, will the EU finally turn away from austerity?

from Dean Baker

Voters in the United Kingdom caught almost everyone by surprise with their decision to leave the European Union. The push for Brexit was driven by nationalistic, xenophobic and racist sentiments. There is no point in putting a pretty face on it. But this vote is now a fait accompli. The question is how the leadership of the European Union chooses to respond.

In the lead up to the Brexit vote, there was much discussion of punishment. Wolfgang Schauble, the finance minister of the European Union, had made several comments implying that the UK would be punished if its people voted to leave the European Union. The idea was that if they don’t want to be in the European Union, then Schauble and his colleagues would impose substantial trade barriers following the country’s departure. Since the UK is so heavily dependent on trade with the EU, large trade barriers would impose real costs on the British economy.

Of course, such trade barriers would also impose costs on the EU. The costs would not be as large on the block as a whole since the UK is less important to the EU than vice-versa, but the costs would nonetheless be a big hit for the countries that have the most trade with the UK. In effect, the EU leadership would be imposing costs on its people in order to punish voters in the UK for wanting to leave.  Some of the drive for punishment seems like a spurned lover story. Having been rejected by UK voters, the EU leadership is now intent on making them suffer. That’s not the sort of attitude that should determine economic policy.

But there is a more serious angle. The UK is hardly the only country where much of the public is unhappy with the EU. If the UK can engineer a relatively painless departure, then other countries may wish to follow its lead. From this vantage point, punishment is important since it will show the rest of Europe that leaving the EU really hurts.

It would be unfortunate if the EU went this direction. The better path would be to ask why it is that so many people are unhappy with the EU. It isn’t too hard to find answers. Part of this is the bureaucracy, which is widely viewed as bloated and unresponsive to the European people. However, what is probably more pressing for most voters is the state of Europe’s economy.

Many countries in the EU still have not recovered their pre-recession level of output and employment. For example, GDP is still down from its 2007 level by almost 6.0 percent in Portugal and 8.0 percent in Italy. Employment in Spain is down by more than 2 million, which is more than 10 percent of its pre-recession employment. In Greece, employment and GDP are both down by more than 20 percent, a track record that makes the Great Depression look mild by comparison.

This bleak economic performance was not dictated by the gods. It was the result of the conscious decision by the EU leadership to turn toward austerity in 2010, long before the economy was close to having recovered. Rather than using fiscal policy to steer economies toward full employment and address needs in infrastructure, clean energy, education and health care, the EU leadership demanded that governments move toward balanced budgets. This meant cutbacks in spending and tax increases that worsened and prolonged the downturn.

The EU leadership apparently likes balanced budgets. It may be something their parents told them. But the EU and the world can no longer be governed by folk wisdom handed down from prior generations; it needs to use real economics. And in real economics, the message is clear, they need to run larger budget deficits to boost economies and reduce unemployment.

The logic here is straightforward. If a deficit is too large it pushes up interest rates. And if central banks accommodate large deficits to keep interest rates down, then it leads to inflation.

Well, interest rates are about as low as they can be. In fact, the interest rate on Germany’s 10-year bond is now negative. You have to pay the German government to lend it money. Inflation is also nowhere in sight. The inflation rate has been barely positive for most of the last five years and certainly well below the European Central Bank’s 2.0 percent target. It’s hard to see a serious harm if interest rates rose to more normal level and inflation increased to the level that the European Central Bank targets.

In short, there is no argument against spending more money to both boost growth to create jobs and meet real needs.

The proper response to the Brexit vote would be for the EU leadership to finally embrace reality and adopt an economic policy that will push the continent toward stronger growth and full employment. If it goes this path, the rest of the EU will not be anxious to follow the UK’s lead.

If the EU leadership instead goes the route of tit for tat and tries to punish Britain, Brexit will be the first round of a very unhappy story.

See article on original site

  1. Tom Welsh
    June 25, 2016 at 1:36 pm

    “The push for Brexit was driven by nationalistic, xenophobic and racist sentiments”.

    No, it wasn’t. No doubt there are British people who have such sentiments, but the main motivations for Brexit were preserving the independence and sovereignty of the UK in the face of a concerted effort to take them away; preserving the British legal rights of habeas corpus, presumption of innocence, trial by jury, and free speech; and keeping our traditional system of government – parliamentary democracy.

    Limiting immigration was certainly an important aspect of the campaign. The UK has a population of 64 million; the EU, 680 million; the world, 7.2 billion. Moreover, the UK’s population density is nearly five times the global average and eight times that of the USA. Obviously, we cannot allow any number of people to enter and live here. Even 100 million Einsteins or Edisons could not be accommodated. It’s not a matter of where immigrants come from, or their race, religion, or culture. As long as EU law required us to let in every one of the 620 million other EC citizens who wanted to come, we had to clamp very hard down on immigration from the rest of the world – which might be more valuable to us. Once out of the EU, we can choose to admit so many from the EU, and so many from other places.

  2. Tom Welsh
    June 25, 2016 at 1:38 pm

    This article by the famous author Frederick Forsyth explains the EU and its openly-admitted goals clearly and concisely:

    http://www.express.co.uk/news/politics/679277/History-EU-how-bureaucrats-seized-power

  3. graccibros
    June 25, 2016 at 2:22 pm

    Dean’s comments here should remind us of the broader European context. In July of 2013, Yanis Varouvakis, James Galbraith and Stuart Holland published a paper, “A Modest Proposal for Resolving the Euro Crisis, Version 4.0” which still can be found here:
    https://varoufakis.files.wordpress.com/2013/07/a-modest-proposal-for-resolving-the-eurozone-crisis-version-4-0-final1.pdf

    The paper gets pretty wonky in its detailed references to many parts of the Euro machinery and how the economic and financial institutions do or don’t mesh with the political mechanisms, but I think I can perform a competent translation for you: their proposal built on existing funds and institutions to enable a New Deal like spending program for public works and job creation which could be aimed at the suffering periphery states without having to come before each nation’s parliament for a vote.

    Despite the hardly radical intellectual heritage of their proposal, it went nowhere, and the reason is very revealing about where the intellectual center of Neoliberalism is in Brussels, Frankfort and the private financial powers on the continent: it is well to the right politically and economically of the New Deal. Indeed, the dynamics today, as Varoufakis is now reminding us almost daily, are very close to those described by Karl Polanyi for Europe in the 1920’s and 1930’s, with Neoliberalism’s fiscal and monetary policies being built around “austerity” targets, much in the way the gold standard operated to keep public policy options inside tragically limited boundaries after 1929. (In his seminal book, “The Great Transformation.”

    I will have more to say about this and Polanyi’s relevance in a forthcoming essay in the Real-World Economics Review, “Karl Polanyi and the coming U.S. Election.”

    I think the real question that should worry us is how far the advice being dispensed to Sec. Clinton by Larry Summers, Joseph Stiglitz is willing to stray from the boundaries they set themselves in their long policy “advisories” from 2015. In Europe, in Britain and France in particular, the centrist parties, even with names such as Labor and Socialist, are once again proving that they can’t rise to the occasion of great crises…not as capable as the Right seems to be, for better or worse, mostly worse, in harnessing emotion to politics in a constructive way.

    The vote in Britain to exit is a reminder to us all of just how high the stakes are, and perhaps, tragically, yet prophetically, the murder of Jo Cox was the barometer which might have told us how deep the layer of unhappiness was in Britain; I write about what the comparable temperature readings are in the U.S. In many ways, but not all, they escape the common economic statistics. For example, recent surveys of consumer attitudes and conditions conducted by the Federal Reserve itself disclosed the shocking extent to which 50-60% of U.S. families could not meet a $400-1,000 financial crisis without liquidating assets. I found that to be extraordinarily revealing, especially since chronologically we are about due for another recession, independent of another financial crisis which may have other triggers.

  4. louisperetzperetz
    June 25, 2016 at 4:47 pm

    “The logic here is straightforward. If a deficit is too large it pushes up interest rates. And if central banks accommodate large deficits to keep interest rates down, then it leads to inflation.” I think this is not quite right. Why are you afraid about inflation? It could be soft. Denis Blanchard, who was a chief director of the financial department of FMI, said that it could be about 4 % rate, whithout disturbing anymore the real economy of a country.

  5. June 25, 2016 at 7:35 pm

    “In short, there is no argument against spending more money to both boost growth to create
    jobs and meet real need.”

    Well in the US at least, of course there is. The Republican Party, particularly the Tea-wing has been working even before the inauguration of Barack Obama as President to end the “welfare” state. Including Social Security, Medicare, free school lunches, etc. and to place the full burden to pay for college and technical education on the student. The reason, so they say is that each individual only becomes mature, productive, and not a burden on the government by having to “pay their own way.” This philosophy has been around for centuries in the US, brought over mostly from the UK. But it’s what’s hidden and not said, at least not publicly or widely of this philosophy that is more telling. First, even a cursory study of US and UK history shows that for the vast majority of people it is simply not the way they lived. Community membership, responsibilities, and mutual aid are much more the “fact of life” for most of US and UK history for the “non-elites.” And a Sir Arthur Conan Doyle’s pointed out the elites are merely formerly non-elites who demonstrate exceptional skill and cunning at taking advantage of their communities and their fellow members of that community. Second, keeping non-elites worried, poor, and uncertain about the future is one of the “cunning” ways the elites take advantage of them. It also helps the elites fortify their control of the non-elites. Third, periodically the frightened, poor, and paranoid non-elites stage a rebellion against their persecutors. Which always end the same way – control is reasserted, some elite positions change hands, and life for the non-elites grows even worse. Finally, the trappings of democracy such as voting and dressing down your MP or Representative give cathartic but no substantial relief to the situation. Sociologist Robert Michels in his 1911 book, Political Parties claims that rule by an elite, or oligarchy, is inevitable as an “iron law” within any democratic organization as part of the “tactical and technical necessities” of organization. I believe he was and is correct. All complex organizations, regardless of how democratic they are when started, eventually develop into oligarchies. An elite or several combined elites rule. You kill off one, i.e. the EU bureaucracy and soon thereafter another arises. If anyone can see a way out of this, short of giving up on complex collective organization I’d be interested in hearing about it.

    • June 26, 2016 at 8:07 pm

      “The European Union has sowed the wind. It may reap the whirlwind. Unless it moves, and quickly, not merely to assert a hollow “unity” but to deliver a democratic, accountable, and realistic New Deal – or something very much like it – for all Europeans.” James Galbraith.
      https://urpe.wordpress.com/2016/06/25/the-day-after-james-galbraith-on-brexit/

      “Brexit, to deliver a democratic, accountable, and realistic New Deal ”
      THE “BREXIT” SOLUTION TO DECREASE INEQUALITY GAPS, POVERTY, and NATIONAL DEBT.
      ONE SENTENCE -A CAPITALISTIC ECONOMY WITH A HONEST CENTRAL BANK.
      AN HONEST CENTRAL BANK (GUARDIAN) THAT BORROWERS MONEY FROM ITS LAWFUL OWNERS(THE PEOPLE), LENDS IT AND CHARGES INTEREST (TAX) TO SECURE AN INCOME STREAM TO TURN OVER TO LEGISLATORS TO USE FOR THE BETTERMENT OF ALL.
      READ MORE: by Justaluckyfool http://bit.ly/MlQWNs

      Justaluckyfool, “..Capitalism is the best system to date devised by mankind. As it is administrated, perhaps, is where the ‘flaw’ is manifested. If capitalism used its Central Bank properly, with honesty, accountability and transparency for the betterment of the common good, with equality and justice for all, capitalism could be one of the greatest achievements of mankind.”

      Quote Soddy,
      “… money has become the life-blood of
      the community, and for each individual a veritable
      licenseto live at all. ” SODDY.
      … unless and until the barriers that oppose the free and full distribution of wealth from the producer to the
      ultimate user and consumer are broken down and the flow of wealth again fulfils the purpose for
      which men have striven to create it. Since, in all monetary civilizations, it is money that alone can effect
      the exchange of wealth and the continuous flow of goods and services throughout the nation, money has
      become the life-blood of the community, and for each individual a veritable license to live at all.”
      Free download-“The Role Of Money” by Frederick Soddy
      https://archive.org/…/rol…/roleofmoney032861mbp_djvu.txt

      • June 27, 2016 at 2:57 am

        I understand this blog is aimed at economists. Maybe that’s why so many of the comments on the BRexit and related matters miss such very obvious things. One thing in particular. The claim that “…Capitalism is the best system to date devised by mankind” is irrelevant in terms of the lives humans want to live. The only “system” (groups of living arrangements) that matter are governmental. Humans during the First Agricultural Revolution 10,000 years ago began to set up governments to protect and organize their options to establish religious worship, economic transactions, create art, form families, etc. Government makes economics possible, not the reverse. The focus should be therefore on the ways people live collectively. From these economies derive. Denying this does not change it. When neoliberals deny it the result is simple and predictable — neoliberalism becomes, takes over as government. And we see that happening all around us. Neoliberal government makes room for only one sort of collective life, a neoliberal one. No room for any other sort of life. Makes me wonder why so many commenters here are surprised by the governments of the UK, Germany, and even the US making and enforcing policies that increase wealth inequality and poverty, reduce access to health care, force the poor to compete against one another to make themselves poorer, destroy senior security, etc. All well-known neoliberal dogma. And now government policy. It’s government, not the economy we need to take back if we want this to change. Right now the debates are among groups that control government based on one or another version of neoliberalism. Government has to be reformed based on non-neoliberalism. That will eventually provide the space to construct economies that do not look or behave like neoliberalism.

  6. June 25, 2016 at 11:33 pm

    “This bleak economic performance was not dictated by the gods. It was the result of the conscious decision by the EU leadership to turn toward austerity in 2010, long before the economy was close to having recovered. Rather than using fiscal policy to steer economies toward full employment and address needs in infrastructure, clean energy, education and health care, the EU leadership demanded that governments move toward balanced budgets. This meant cutbacks in spending and tax increases that worsened and prolonged the downturn.”
    **So why stay ?
    **So why trade with any country that can’t pay its present credit, let alone its future credit?
    “In short, there is no argument against spending more money to both boost growth to create jobs and meet real needs.”
    **OMG, Can the Bank Of England do just that ?
    “The proper response to the Brexit vote would be for the (NO,NO, read UK…not ) EU leadership to finally embrace reality and adopt an economic policy that will push the continent toward stronger growth and full employment. If it goes this path, the rest of the EU will (delete… not), be anxious to follow the UK’s lead.”
    **This could be the first step for the EU toward solidarity with its members…
    IF only they understood, Quote SODDY, “… every monetary system must at long last conform, if it is to fulfil its proper role as the distributive mechanism of society.”… unless and until the barriers that oppose the free and full distribution of wealth from the producer to the
    ultimate user and consumer are broken down and the flow of wealth again fulfils the purpose for which men have striven to create it. Since, in all monetary civilizations, it is money that alone can effect the exchange of wealth and the continuous
    flow of goods and services throughout the nation, money has become the life-blood of
    the community, and for each individual a veritable licence to live at all.”
    Free download-“The Role Of Money” by Frederick Soddy
    https://archive.org/stream/roleofmoney032861mbp/roleofmoney032861mbp_djvu.txt

  7. June 26, 2016 at 7:11 am

    Economic policy changes of the sort Baker proposes would be welcomed but the real probem with the European Union is institutional. The joke about the so-called oppression of Brussels is that the lack of a Brussel’s European government is the real problem. Americans faced the same problem in mid19th century and chose to create a real federal system in the civil war and its aftermath. Brexit people argue that they have a nondemocratic eu, with nonelected bureaucrats running the show. The Brixit people are being disingenuous, they opposed any development of an effective federal system with a European government based on a democratically elected European parliament. Without an effective European government European problems cannot be solved, like the migration problem, or Russian encroachment on EU member states effectively confronted. I see no strategic thinking about the place of Europe being discussed by anybody. In 1982-84 I spent two years at the European Institute for Advanced Studies in Management. During that time I observed that there were no Europeans in the “Eurropean” Institute, only Dutch, Finns, Britis, Begians, and no Germans or French there. Imagine a European institute without Frenchmen or Germans in it. There was only one European at the institute and he was an American (me). The European project has failed for that reason. The nonEuropeans in Europe (all the nationalists, regionlists) refuse to build up effective governmental institutions. Without them no effective European project.

    • June 26, 2016 at 7:15 pm

      Bob, once again you hit the nail on the head. “The nonEuropeans in Europe (all the nationalists, regionlists) refuse to build up effective governmental institutions. Without them no effective European project.” And the Brits were one of the worst offenders. As a nation the UK consistently opposed the creation of an EU government, democratically elected from all the EU nations. This would reasoned the nationalists in the UK reduce the ability of local politicians and economic interests to control what happened in the UK and in the UK’s relations with France, Germany, and the rest of Europe. Although such an EU government actually might have made life better for many UK citizens, this did not matter to local politicians and power holders in the UK, as it would likely hurt them personally. Your analogy about the invention of real federalism in the US during and after the Civil War is relevant. But this was a long journey. It was not until the 1970s that effective federalism began to operate in the US. And that lead to the “conservative” backlash that grows stronger today with Donald Trump and Sarah Palin. But this backlash could have been handled more intelligently and certainly more openly. Instead neoliberal economic and social policies denigrated and segregated the portions of the US population struggling the most with local economic, education, and governing issues. Feeling ignored and attacked now many of these folks rally round Trump, Palin, etc. They’re simply afraid they have no other possible saviors. The case is similar for the UK and the EU bureaucracy. UK refused to allow a democratic EU to develop. And then blamed that on the EU. Both abandoned the ordinary citizens in the UK. And these citizens struck back with the BRexit vote. Unfortunately, leaving the EU will not solve these problems in the UK, so long as neoliberalism remains in the control in the UK. Which seems likely the case. Labour has shown it will not and cannot change this control. UK citizens voted on the wrong referendum. Now they need one on ending neoliberal policies of austerity, unfettered markets, and free-for-all labor policies. Marx was wrong about many things but he was, as history shows correct about the tendency of any set of fixed arrangements for society and economy to push their “good thing” too far to the point breakdown and change. This might be the denouement for neoliberal dominance in the UK.

      • June 27, 2016 at 6:02 pm

        The failure to built an effect EU government has led to the curious situation that those like the Scots who want to remain in the EU have nobody to talk with about it in the EU. The failure to create an effective EU government has led to the curious situation that the UK can call all the shots in the “negotiations” over Brexit, when and even if to trigger article 50, what specific conditions for the exit, while the EU people have no policy formulating voice because their is no EU government.

      • June 28, 2016 at 5:00 am

        All summed up with the phrase “unaccountable bureaucrats.” The solution is to make them accountable. Why is breaking up the EU a better option than this?

  8. louisperetzperetz
    June 26, 2016 at 7:20 am

    What Carmen says seems to be the good system. Spending money is exacty the will of J.M Keynes. Running money ia a dynamic system which need energy to work. Unhappily financial banks do not like it because they are afraid of inflation.

  9. June 26, 2016 at 9:30 am

    “The logic here is straightforward. If a deficit is too large it pushes up interest rates.”

    This seems to be referring to the celebrated “crowding out” theory. Government borrowing is supposed to “crowd out” private sector borrowing. However there is ample evidence to demonstrate that a crowding out effect does not apply to most borrowing by sovereign governments. The latter do not compete with the private sector for funds. Deficit spending by a sovereign government does not in any way reduce funds available for private sector borrowing purposes. Moreover, banks do not really need reserves in order to lend. Such lending is constrained by each bank’s net worth, not by its reserves.

    The only situation where such a government budget deficit would be able to crowd out the private sector is when the government net spends to a level which pushes total spending within the economy beyond the economy’s productive capacity, which would certainly lead to inflationary pressure. However no sane economist would recommend that a government should net spend in this way.

  10. graccibros
    June 26, 2016 at 7:23 pm

    I think several commentators here are confusing Dean Bakers’ summarizing of the logic of Neoliberalism inside the reigning Brussels/Euro Institutions for Dean’s own thinking, when he is actually refuting them, which he does in the paragraph immediately after the one that begin with “the logic here is straightforward.” In essence, he is saying the bond vigilantes have not taken to their midnight right against the current budget imbalances…

    My further observation today after listening to Fareed Zakaria on his show GPS, Sunday, June 26th, where he said the Brexit is less left against right than “open vs closed,” as in for globalization or for retreating behind nationalist barrriers. I’m not sure how, in the West, at least, you separate globalization from Neoliberalism, but he did, and once again, an prominent American failed to mention the reigning philosophy with its harsh austerity wringing the life out of the working classes with lesser education both in the US and Western Europe, Zakaria citing the educational gulf between exiters and those who wanted to remain.

    How does the left win the fight for a new vision, though, if the struggle is on cultural rather than economic grounds? It doesn’t so far, and the old left, if they are represented by Holland, offers the French the absurdity of the Socialist party working to impose longer hours and less pay for the Euro-German austerians, and fighting their own constituency in the streets…no wonder Marie Le Pen is doing so well.

    Yanis Varoufakis is fighting the good fight for a new “universalism of the left,” which, is interestingly, not for a tougher brand of socialism – he thinks that is not possible at the present moment but just for a New Deal for Europe won by changing the reigning ideology in Brussels via the composition of the European parliament and the other inputs that national gov’ts have…this makes intellectual sense to me, but it is failing emotionally in its competition with the Right at present; and the left has to face the fact that the exit vote is likely to trigger even harsher UK austerity will Cameron’s successor. That feeds the desire of Scotland and Ireland to say – there’s nothing left in this UK for us…but I fear for their future in going it alone as such small nations, feeding the surge of disintegration with the French likely to follow…

    And back home, what is Mrs. Clinton thinking? Does she realize that the center is not holding, that the cautious incrementalism that was her trademark to differentiate herself from Senator Sanders more sweeping proposals is perhaps the wrong strategy at the present moment? Trumps self-destructive side feeds her incrementalism, justifies it, Dems have been trading in this for some time now against the Republican Right, but even if it still gets them elected, I have the strong hunch that this complacency is not going to be able to meet the disintegrative effects proceeding now from, let’s be candid, capitalism’s deep troubles under Neoliberal policy. That’s my diagnosis, along with Varouvakis and many others; we know historically that the pathways to deflect the less educated from facing that squarely have been remarkably successful – and horrifically destructive. And a good portion, perhaps a majority of the top 20% income demographic, can never face up to the fact that their economic system, the one that has treated them so well, can run off the rails on a historically “regular” basis…that’s where Zakaria is coming from.

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