In Place of Austerity: What Comes Next?

by Simon Nixon

Wall Street Journal
April 29, 2013

Europe stands at a crossroads. Italy's new prime minister, Enrico Letta, says "austerity is no longer sufficient." A leaked draft of a French Socialist party document accuses German Chancellor Angela Merkel of "selfish intransigence" for her insistence on austerity. Spanish Prime Minister Mariano Rajoy unilaterally abandons his country's deficit targets for the next two years and rules out new fiscal measures. European Commission President José Manuel Barosso provocatively claims austerity has reached the limits of social and political acceptance.

The backlash against austerity may be real. But much of the debate is fake. Behind much of the antiausterity campaign lies an assumption that the euro zone's crisis response reflected a political choice whose intellectual underpinnings have been fatally undermined—not least by a furious debate over an academic paper by Kenneth Rogoff and Carmen Reinhart that suggested government debt above 90% of gross domestic product is a drag on growth.

This is nonsense: What has been driving the euro zone's hand isn't academic theory but market pressure. For peripheral euro-zone countries facing high borrowing costs or reliant on international aid to fund their budget deficits, fiscal consolidation wasn't a choice but a necessity. At the same time, core euro-zone countries understood only too clearly that no country in a currency union can afford to take market confidence for granted.

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