Austerity's Unintended Consequences

AP Photo/Mauro Scrobogna, LaPresse

Italian media mogul and former ex-Premier Silvio Berlusconi during a television appearance last week. The latest political polls suggest he is gaining ground on center-left candidate Pier Luigi Bersani ahead of Italy's elections.


Is the worst of the Eurozone crisis over? The optimists—out of conviction or calculation—say “yes.” The European Central Bank’s promise to purchase an unlimited amount of government bonds from member-states who find their credibility questioned by the capital markets has brought the borrowing rates of the European periphery down to manageable levels without spending a single euro. Ireland, the second Eurozone country to require an international bailout in November 2010, has already made a partial return to the markets for long-term borrowing, while Portugal, which was bailed out in May 2011, hopes to do so later this year. Even Greece seems to be making headway with reforms and fiscal consolidation, the result of which has been that the word “Grexit” no longer passes from European officials’ lips. 

But recent developments in Spain and Italy highlight the fragility of the Eurozone’s newfound stability. In Spain, the conservative government of Mariano Rajoy has been rocked by allegations that he and other top officials of the ruling People’s Party (PP) received annual payments from a secret slush fund financed by construction magnates, in breach of the country’s party-financing laws. The prime minister himself, according to records released by El País newspaper which it claims were drawn up by former PP treasurer Luis Bàrcenas (he denies it), received over 300,000 euros from the secret fund between 1997 and 2008. Rajoy, a close ally of chancellor Merkel who has been prime minister since November 2011, denies any wrongdoing. During the weekend, he released his tax returns for the past ten years in support of his claims of innocence. There was nothing incriminating in them, but—as critics were quick to point out—it would be naïve to expect illegal political “donations” to appear in official tax statements. 

Spanish prosecutors are investigating the case, but the legal process is notoriously slow. Meanwhile, unemployment in the country has reached 26 percent, youth unemployment is at 55 percent and the economy is expected to shrink further: having already registered six straight quarters of negative growth, the Spanish economy is forecast by the International Monetary Fund to contract by 1.5 percent in 2013, as Brussels-mandated austerity deepens Spain’s double-dip recession. Voters would be angry at politicians taking kickbacks from big business even in normal times. When those accused of lining their own pockets have imposed such heavy sacrifices on the people, raising taxes, cutting spending, stripping away employment protection regulations, and when those making the payments were leading authors of the real-estate bubble whose bursting broke the back of the Spanish economy after 2008, this anger can turn into a flood that sweeps the Rajoy government away. Even if that doesn’t happen, a prime minister whose approval rating had dipped below 20 percent even before the recent scandal broke out will find it increasingly difficult to continue implementing the draconian austerity policies that he has committed himself to.

While instability in Spain is a major worry for Europe’s crisis managers, the political comeback of Silvio Berlusconi in nearby Italy is more like a Hollywood horror flick in which a monstrous villain once considered dead and buried returns to wreak havoc anew. From the point of view of Europe’s big players, Berlusconi’s resignation as prime minister 15 months ago—which elevated Mario Monti, a widely respected economist and former European Commissioner, to the position—ushered in a necessary period of structural reform and budgetary discipline that improved Italy’s economic fundamentals and, for this reason, led to a significant drop in the country’s borrowing costs. After three terms as prime minister since the mid-1990s—in which he failed to reform the Italian economy or to reduce the debt burden of the government and became mired in financial and sexual scandals—Berlusconi was thought by top officials in Berlin, Brussels, and Frankfurt (seat of the ECB) to be a spent force.

 Yet since he decided last December to pull his support from the technocratic government led by Monti, leading to early elections being called for 24th-25th of February, a funny thing has been happening: he has been gaining in the polls. Just as in 2006, when everyone wrote him off but he ended up losing by only 0.1 percent of the vote, he has narrowed a 20-point gap from the frontrunners, the center-left bloc led by Pier Luigi Bersani of the Democratic Party, to 5-6 percentage points. He is even within the margin of error in a couple of recent polls. Berlusconi has done this through a well-worn combination of clownish antics and outrageous pledges, like the one about repealing an unpopular property tax passed by the Monti government and reimbursing all those who paid it in cash.  

Beyond his undisputed abilities as a salesman, the reason the 76-year old Berlusconi, who is currently appealing a conviction for tax fraud, is still able to command this kind of support is simple enough: austerity, imposed by Berlin, Brussels, and Frankfurt and implemented by the Monti government, has dragged Italy into its longest recession since the second World War. Chancellor Merkel may be a big fan of Mario Monti, but the Italian people are less enthused; the coalition led by the technocrat-turned-politician is fourth in the polls, weighed down among other things by attacks from Il Cavaliere painting the prime minister as a stooge of Berlin.

The payments scandal may blow over in Spain. The Italian elections may lead to a stable Bersani-Monti coalition that will keep Berlusconi far from the levers of power. But the big picture is that the Eurozone slid back into recession in the third quarter of 2012. The IMF predicts it will contract by 0.2 percent in 2013, while its jobless rate is currently at 11.8 percent—the highest since the inception of the euro. The German-inspired austerity overdrive may have improved public finances in Rome, Madrid, and Athens, but the human cost has been staggering and the unintended political consequences—from the resurgence of Berlusconi to the rise of the Neonazi right in Greece—have been disastrous. 

One would expect this unfolding economic and social catastrophe to produce a sense of urgency among Europe’s leaders to do their part to stimulate growth and aid the countries at the Eurozone periphery in their struggle to reform. Instead, we witnessed last week the depressing spectacle of the negotiation for the European Union budget for 2014-20. Equal to less than 1 percent of the combined GDP of the member-states but offering a vital stimulus to the smaller and economically weaker among them, its size and the contributions and receipts of each country became once again the object of bitter bargaining. At the end of it all, the new budget was cut by 3 percent compared to the 2007-2013 period. Apparently, talk of a common European economic destiny is good for demanding sacrifices from the South but not for extracting cohesion funds from the North. 

The new Eurozone cannot be built out of such small-minded stuff. 

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