My Evening Standard article: austerity has failed in Europe — we must all now go for growth

Eurozone leaders will be tempted to breathe a sigh of relief after yesterday’s Greek vote. It may buy a little time. But if the world’s prime ministers and presidents think the pressure is now off, as they meet at the G20 summit in Mexico, they are living in cloud-cuckoo-land.

I warned in my Bloomberg speech nearly two years ago that a global hurricane was brewing; and that before economic recovery had been secured, a premature rush to austerity — led by Britain’s new Chancellor — risked tipping Britain and the world back into recession.

Britain is now in that double-dip recession. Other countries are bound to follow. And the global hurricane I forecast is well and truly upon us. There is now a real risk of the global economic recovery being swept away. So what should world leaders do?

First, the eurozone must admit that muddling through, patching up bank vulnerabilities, country by country, while sticking to the ideology of austerity has failed and is now building to a catastrophe.

The eurozone countries — above all, Germany — must face up to the economic and political logic of the single currency they have signed up to: that they stand or fall together and must do whatever it takes to support any and all of its members in difficulty. That means a recapitalisation of troubled banks and the European Central Bank able to act — like the Bank of England can in Britain — as a lender of last resort to support banks and countries in the euro area.

As long as that doubt remains, market confidence will not be restored and this crisis will not be resolved. That deep uncertainty is why last weekend’s bail-out of Spanish banks has not restored market confidence. And it is why, without a proper firewall to stop contagion spreading to other troubled economies such as Spain and Italy, a disorderly Greek exit would be catastrophic not only for Greece but for the rest of Europe and the world economy.

There is no easy option for Greece, given its problems. Difficult reforms are vital. But how can an austerity plan — which has seen recession turn into depression, youth unemployment soar to more than 50 per cent, the economy shrink by six per cent in the last year alone and the national debt grow further — be seen as a success? As even the credit rating agencies now recognise, as Standard and Poor’s puts it, that “austerity alone risks becoming self-defeating”.

The irony is that yesterday’s vote now allows eurozone leaders to do what they should have done before. They must now revise the Greek bailout agreement if it is to have any chance of economic success or lasting political support.

Second, we need a global growth plan. President Obama and new French President Hollande are right to argue for action now to stimulate economic growth and employment, as part of tough medium-term plans to get deficits down. They deserve support from every world leader. So why is our Prime Minister unable to join them in trying to persuade German Chancellor Angela Merkel to change course? Because he has spent the past two years championing the very German-led austerity policies which are not working across the eurozone or in Britain.

The consensus of the past two years between David Cameron, Angela Merkel and former French President Sarkozy — “Camerkozy” economics — has been horribly exposed. Tough decisions on tax and spending are needed but if every country cuts at reckless speed at the same time, the world will risk tipping back into recession, and it will be harder to bring deficits and debts down.

So, third, the G20 meeting is the right place for Britain and Germany to admit they have got it wrong, take the IMF’s advice and commit to coming up with more balanced national plans.

Of course, we in Britain are not immune from the eurozone crisis. But our Chancellor is deeply complacent to blame it for everything that’s wrong in our economy. Britain has not grown in the year and a half since his spending review. We are the only G20 country other than Italy already in a double-dip recession. And only exports to Europe and the rest of the world stopped us going into recession a year ago.

This Government made a reckless decision two years ago — raising taxes and cutting spending too far and too fast — which has left Britain in a much weaker position as the global hurricane builds around us. If our European neighbours like France and Germany — which have so far avoided slipping back into recession — follow us into a double-dip, where will the jobs and growth we need now come from?

That is why we need urgent action now to stimulate the British economy. Sir Mervyn King recognised how bad things were last week when he announced that the Bank of England would lend money to the banks on condition they lend it on to businesses.

I hope this succeeds where previous schemes have failed in helping firms struggling to get credit. But it will not tackle the fundamental problems in our economy — a lack of confidence and a lack of demand.

We need a change of course on fiscal policy from our Chancellor with action to boost jobs and growth. A balanced plan now to get the economy moving again should include bringing forward long-term infrastructure investment, a temporary VAT cut to ease the squeeze on household budgets, tax breaks for small firms taking on extra workers, and a bank bonus tax to fund jobs for young people.

Unless businesses grow, the economy starts moving again and we get people off the dole and into work, we will not succeed in getting the deficit down. And we risk paying a long-term price — long-term youth unemployment entrenched, investment decisions postponed and our manufacturing and service sector industries — including the City of London — damaged as a result.

The lesson of history is that economic problems, like a hurricane, are slow to build but sudden to strike. There is little time left. We need decisive action now. Will our leaders finally lead?

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Posted June 18th, 2012 by Ed