Europe’s Leaders Ditch Austerity and Fight Pandemic With Cash
Author: Peter S. Goodman
Source: The New York Times
Date: March 26, 2020
“It’s not enough that all of a sudden the taboos are temporarily falling,” said Mariana Mazzucato, an economist at University College London. “It’s about changing the way we do capitalism.”
At least for the moment, the pandemic has delivered a palpable refashioning of the principles guiding policy.
LONDON — A British prime minister from the party of Margaret Thatcher has effectively privatized the national railway system, while forsaking budget austerity in favor of aggressive public spending. Germany has set aside its traditional detestation for debt to unleash emergency spending, while enabling the rest of the European Union to breach limits on deficits.
The European Central Bank has transcended a legacy often marked by calamitous inaction in the face of crisis to produce something that has frequently seemed impossible: a decisive and timely response.
The coronavirus pandemic sweeping the globe with lethal and wealth-destroying consequences has proved so jarring to the powers-that-be on the European side of the Atlantic that they have discarded deep-set taboos to forge atypically swift and pragmatic responses.
“This pandemic is really like a war,” said Maria Demertzis, an economist and deputy director of Bruegel, a research institution in Brussels. “In a war, you do what you have to do.”
The question is what happens when the attack phase gives way to the longer-term project of recovery — whether the extensive deployment of government largess continues, or whether Britain and Europe snap back to their mode of recent decades, casting a wary eye on the ledger books.
During the last crisis, the global financial catastrophe of 2008, the authorities protected corporate interests above those of ordinary people, many economists assert. Britain and the European Union bailed out financial institutions, then recovered the costs by hacking away at public services, effectively punishing laborers and taxpayers for the sins of wealthy bankers.
Only a dozen years later, Europe and Britain are again dispensing enormous sums of public money to rescue large businesses from economic devastation. Will the authorities condition their aid on requirements that companies avoid layoffs? Will governments permanently banish austerity, concluding that excessive budget-cutting has left national health systems especially vulnerable to the virus?
Beyond the current moment of emergency, some argue that the crisis will be squandered if it does not prompt meaningful change in the structure of economies after life returns to normal.
They portray the rescues as an opportunity to transform the nature of the state’s role in the economy — for Britain to restructure its neglected and overwhelmed health service; for the European Union to collectivize its debts while targeting investment at southern European countries like Greece, Italy, Spain and Portugal, which have been neglected as the poor stepchildren of the European bloc; for governments to demand that corporations treat their workers fairly as a condition of bailouts.
“It’s not enough that all of a sudden the taboos are temporarily falling,” said Mariana Mazzucato, an economist at University College London. “It’s about changing the way we do capitalism.”
At least for the moment, the pandemic has delivered a palpable refashioning of the principles guiding policy.
In Britain, a public health crisis twinned with a near-certain recession has dispatched to history the age of austerity while prompting the majority Conservative party to break sharply from dogmatic conceptions of governance that have prevailed for decades.
During the 1980s, Ms. Thatcher substantially diminished the traditional social welfare state and embraced the privatization of national industry. Over the last decade, Conservative-led governments have delivered wrenching spending cuts.
During December’s national elections, the head of the Labour Party, Jeremy Corbyn, vowed to nationalize key industries including railways, earning him widespread derision as a man effectively inclined to turn Britain into Venezuela.
The current prime minister, Boris Johnson, has rarely been accused of harboring a strong belief in anything. He has taken the pandemic as the impetus to restore to primacy a vaunted British thinker from the last century — the economist John Maynard Keynes, who argued that government spending was the curative when economic trouble breaks out.
Two weeks ago, Mr. Johnson’s government unveiled a budget that relied on public borrowing to finance a muscular build-out of national infrastructure. Days later, the government announced apackage of spending measures worth some 330 billion pounds (about $387 billion), including government-guaranteed loans and tax breaks for companies whose businesses were threatened by the pandemic, plus relief from mortgage payments for homeowners.
On Monday, Mr. Johnson’s government nationalized the railway system for at least six months, covering all the losses at a time when people are avoiding trains during a national lockdown.
Germany’s new inclination to borrow is an equally striking turn. The nation is infused with a loathing of debt reaching religious proportions. Yet Germany this week agreed to a package of spending measures worth 750 billion euros ($813 billion), while borrowing €156 billion.
Germany and other northern European deficit hawks also assented to the temporary lifting of limits on spending in the European Union. That was especially significant to debt-saturated Italy, the epicenter of the pandemic in Europe.
Italy is almost certainly in the midst of a deep recession that will force increased government spending just as the country is overwhelmed by the public health crisis. Its fortunes are now so dire that economists warn that its long-troubled banks could soon require rescue.
Over the last decade, as Greece, Italy, Spain and Portugal each required European help to avoid default, Germany took the crisis as a moment for moralistic lecturing about the supposedly profligate ways of its southern neighbors (frequently omitting how much of their debts were owed to German banks). Berlin conditioned relief on aggressive cuts in public spending, arguing that fiscal austerity would bring renewal. In Greece and Spain, unemployment soared to depression-like levels.
Now, in the midst of a pandemic, Germany is exempting European countries from budget strictures.
“A monumental crisis like this creates the political space to challenge whatever the thinking was before,” said Christian Odendahl, the Berlin-based chief economist at the Center for European Reform.
But Germany’s stance should not be taken as a sign that its people have traded an aversion to debt for a newfound appreciation for Keynesian stimulus.
 “The narrative is completely the opposite,” Mr. Odendahl said. “Germans are saying, 'Well, this is why we did austerity, so that we have the fiscal space to do this where it is really needed.’ We are not challenging the dogma.”
Once the acute crisis gives way to recovery, he added, Germany may lead the way back to European austerity to recover the costs of the rescue.
The most potentially consequential action has come from the European Central Bank, which has agreed to purchase up to €750 billion ($813 billion) worth of government and corporate bonds. That will limit a potentially calamitous spike in borrowing costs throughout Europe.
But northern European countries — especially Germany and the Netherlands — have continued to oppose a measure long advocated by many economists, the sale of so-called Eurobonds, or debt backed by all 19 countries that use the euro currency.
Such bonds could potentially fill a gaping vulnerability in the structure of the euro, giving markets confidence in the endurance of the currency.
Eurobonds have long constituted a political impossibility. Voters in Berlin and Amsterdam cannot countenance having their finances tethered directly to their cousins in Athens and Rome. That may still be true. But if there were ever a time that conditions conspired to break the deadlock, this might be it.
Five years ago, when millions of migrants arrived in Europe from war-torn countries like Syria, calls for European solidarity went unheard amid an upsurge in nationalism and the erection of fencesalong borders.
The following year, as Britain shocked the world with its vote to leave the European Union, some suggested that European leaders would take that as a moment to reflect on their failings and reconsider austerity. That never happened.
As right-wing populist parties surged in ItalyFranceSweden and Germany — often while attacking the European Union as an ossified vessel of the elite — pundits wondered whether this might finally end the punishment of austerity. It was not to be.
But the pandemic presents that rare menace that is elementally cross-border. People in Germany may dismiss economic trouble in Italy as not their problem, but a lethal virus moving north from Lombardy cannot be ignored.
“It’s a matter of life and death,” said Amandine Crespy, a political scientist at the Institute for European Studies at the Free University of Brussels. “No one can be blamed for it.”
The pandemic has exposed the consequences of austerity, forcing Italian doctors to make anguished choices about who lives and who dies in the face of a shortage of respirators. It has deprived the wealthiest people of their customary feeling of protection.
“Everybody is concerned,” Ms. Crespy said. “Everyone is threatened in the same way. What is at stake is the E.U.’s capacity to mount collective action. Something will have to be done.”
Peter S. Goodman is a London-based European economics correspondent. He was previously a national economic correspondent in New York. He has also worked at The Washington Post as a China correspondent, and was global editor in chief of the International Business Times. @petersgoodman