By Gideon Rachman
May 25 2009
SourceThere was a moment, a few months ago, when sensible people in rich countries were considering pulling all their money out of the bank, buying gold ingots and hiding them under the bed. But now that the panic has passed, something less frightening and rather bleaker is beckoning. Welcome to the politics of austerity.
Across the developed world, unemployment, public debt and taxes are rising. When the global economic crisis first hit, it was natural to assume that the poorer and more recent democracies would be most vulnerable to a political backlash. Without the accumulated wealth or the welfare systems to cushion the blow, their populations looked vulnerable. Most countries in central Europe or Latin America only made the transition to democracy in the 1980s, so authoritarian nasties might still be lurking in the shadows.
But perhaps we are looking for trouble in the wrong places. It could be that it will be the richer democracies, such as Britain and the US, that find it most difficult to adapt to the politics of austerity.
Faced with hard times, some central European countries have had to take drastic measures. They do not have the British and American options of borrowing hugely to avoid making painful cuts. In Estonia, public-sector salaries have been sliced by 10 per cent. In Hungary, pensions have been cut by 8 per cent and the retirement age has been raised.
So far, their publics have reacted with remarkable equanimity. Perhaps countries that have recent memories of real turbulence and hard times are better able to shrug off the consequences of a sudden economic setback. The experience of Latin America after the economic crisis of 1998 shows that new democracies can be reassuringly resilient.
As Michael Reid writes in a recent book on Latin America, Forgotten Continent : “The region’s democracies were subjected to a severe stress test during the lost half-decade of 1998-2002, which saw unemployment rise, real incomes fall and progress in reducing poverty halted. Democracy held up – but not unscathed.”
That experience may now be replicated in central Europe. Deep recessions will, of course, cause a political reaction, and extremist parties may gain. But, for the moment, politics remain stable.
Now consider what would happen if the UK or US were to attempt Hungarian or Estonian style cuts. There would be a huge outcry. Long periods of economic expansion mean that citizens in the US and the UK have developed a sense of entitlement. Many people have come to believe that, in the words of the campaign song of Britain’s Labour party in 1997, things can only get better.
So rather than taking the axe to public spending, the British and American governments are borrowing madly, with no sign of any credible long-term plan to balance the books. The US, according to the Congressional Budget Office, now has an annual structural budget deficit of 5 per cent of gross domestic product. In Britain, public debt as a proportion of GDP is set to double.
Both countries are in the fortunate position that the markets will still lend to them. In spite of last week’s warning from Standard & Poor’s, the rating agency, about rising public debt, Britain has (so far) retained its triple A credit rating. Despite President Barack Obama’s stern words earlier this year that a “day of reckoning has arrived” in which America would finally have to address “critical debates and difficult decisions”, the US is planning to run huge budget deficits for the next decade and beyond.
The obvious risk is that when a real day of reckoning does arrive it will be that much tougher. In Britain, Dieter Helm, a professor of economics at Oxford university, is one voice sounding warnings. “The fundamental cause of the current crisis is that consumption has been unsustainably high, based on borrowing too much, investing too little and saving too little,” he says. “If we continue to try to spend even more, and borrow ever greater sums, the eventual effect on the standard of living will be commensurately greater.”
Prof Helm reckons that sustainable consumption in Britain “may be as much as 20 per cent lower than at the peak in 2006-07”. But try telling the British or American publics that they might have to accept a 20 per cent drop in living standards. That might be OK for Argentines or Estonians – but not in London or New York, and certainly not now.
Optimists point out that countries such as Italy and Japan have sustained public sector debts of more than 100 per cent of GDP for years, without ever facing that long-dreaded “day of reckoning” when the currency collapses or the markets refuse to lend any more. The US, with the world’s largest economy and reserve currency, may be in a position to ramp up its debt in a similar fashion and push that nasty day of reckoning ever further into the future.
Britain may not be so fortunate. It does not have the industrial or savings base of Japan or the currency security of Italy’s euro membership. The Conservative party, which is likely to win power next year, has talked of “austerity”. But, with an election looming, it has been careful to avoid spelling out the implications.
Over the past 30 years, Britain and America have often followed the same political and ideological cycle: Margaret Thatcher and Ronald Reagan were a pair, so were Tony Blair and Bill Clinton. But if a rightwing British government takes power in 2010 and launches into a new politics of austerity, then the US and the UK may suddenly look very different places.
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