Just a day after ECB President Draghi acknowledges the problems
caused by European fiscal consolidation, President Hollande of France
effectively sacks his economy minister for speaking out against austerity.
There was a key difference of course: Draghi was careful to say
that “we are operating within a set of fiscal rules – the Stability and Growth
Pact – which acts as an anchor for confidence and that would be self-defeating
to break.” In contrast French economy minister Montebourg apparently called
for a “major change” in economic policy away from austerity, and complained
about “the most extreme orthodoxy of the German right”.
Whatever the politics of what just happened in France, the
economic logic is with Montebourg rather than Draghi and Hollande. Once you
acknowledge that fiscal consolidation is a problem, you have also to agree that
the Stability and Growth Pact (SGP) is also a problem, because that is what is
driving fiscal austerity in the Eurozone. The best that Draghi could do to
disguise this fact is talk about an “anchor for confidence”, to which the
response has to be confidence in what? He must
know full well that it was his own OMT that ended the 2010-12 crisis, not
the enhanced SGP.
Writing for the Washington Post recently, Matt O’Brien asks
didn’t you guys learn anything from the 1930s? That the left in particular
appears to ignore these lessons seems strange. In the UK part of the folklore
of the left is the fate of Ramsay MacDonald. He led the Labour government from
1929, which eventually fell apart in
1931 over the issue of whether unemployment benefits should be cut in an effort
to get loans to stay on the Gold Standard. The UK abandoned the Gold Standard
immediately afterwards, but Ramsay MacDonald continued as Prime Minister of a
national government, and has been tagged a ‘traitor’ by many on the left ever
since.
Not that France needs to look to the UK to see the disastrous
and futile attempts to use austerity to stabilise the economy in a depression.
By at least one
account, the villain in the French case was the Banque de France, which in
the 1920s used every means at its disposal to argue the case for deflation in
order to return to the Gold Standard at its pre-war parity, and it was
instrumental in helping to bring down the left wing Cartel government.
When it did rejoin the Gold Standard in 1928, the subsequent imports of gold helped
exert a powerful deflationary force on the global economy.
So why has the European left in general, and the French left in
particular, not learnt the lessons of the 1920s and 1930s? Why do most
mainstream left parties in Europe appear
to accept the need to follow the SGP straightjacket as unemployment continues
to climb? Perhaps part of the answer lies in more recent memories. After
many years in the political wilderness, François
Mitterrand was elected President in 1981, and his government became the
first left-wing government in 23 years. In the UK and US high inflation was
being met with tight monetary policy, but he and his government took a different course,
using fiscal measures to support demand, and hoping that productivity
improvements that followed would tame inflation. Although the demand stimulus
did help France avoid the sharp recession suffered by its neighbours, inflation
remained high in 1981 (not helped by increases in minimum wages and other
measures that raised costs) and rose in 1982, at a time when inflation
elsewhere was falling. The sharp deterioration in the trade balance that
followed led to pressure on the Franc, and the government’s fiscal measures
were reversed. Economic policy changed course.
To a macroeconomist, this story is very different from today,
where Eurozone inflation is 0.4% and French inflation 0.5%. However, the
political story of the early 1980s associates fiscal stimulus and demand
expansion with ‘socialist policies’, and their failure and abandonment is
associated with Mitterrand staying in power until 1995. When the markets again
turned on fiscal excess in Greece in 2010, perhaps many on the left thought
they would once again have to subjugate their political instincts to market
pressure and undertake fiscal consolidation. Unfortunately it was not the
1980s, but events over 50 years earlier, that represented the better historical
parallel.
