Financial Times
May 16, 2012
A few weeks ago, I wrote that the twists and turns in the eurozone crisis had, in the early months of 2012, lost the power to shock global asset prices. The reason given was that the prophylactic provided by the use of the ECB’s balance sheet essentially trumped the deteriorating economic fundamentals in several countries, notably in Spain. This view has since been severely challenged, but it has just about remained intact; after all, American and Asian equities are still 6-7 per cent up so far this year.
However, the crisis which surrounds political events in Greece threatens to change all that. This is the first major revolt by any electorate against the eurozone’s austerity policies, and it is those policies which have underpinned the willingness of the ECB to use its balance sheet to rescue the banking system. Furthermore, Greece is just the tip of the iceberg. The swing against austerity by voters in the eurozone is manifesting itself in many different places. I have been wondering whether this is good or bad news for the resolution of the crisis.
Until the end of last year, austerity economics had a surprising amount of political support inside the eurozone, and not just in core countries like Germany. This was a reflection of a wider international phenomenon. The UK election in 2010 resulted in a new coalition government which opted for austerity on an accelerated timescale. In the US, the Obama administration absorbed the message of the opinion polls about government debt, and abandoned any attempt to make the case for fiscal expansion. The changes of government in Spain, Ireland, Italy and Greece all involved the arrival of administrations committed to more, rather than less, budgetary austerity.
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