Between courage and prudence

European Union and national Governments in the economic recovery

Legend attributes to Chinese proverbial wisdom the curse “May you live in interesting times”. The ancient Chinese were not thinking of the European Union. However the struggles of EU politicians and officials with the “curse” of the economic crisis are of great interest, since the tense debates circle round fundamental questions of governance. What positive leadership do people legitimately expect from their government? From what hardships do they reasonably look to governments to protect them, at least to some degree? How can a government combine courage and prudence?Governments currently face two simultaneous but divergent demands: to stimulate their economies in order to support the recovery from recession, and to end the upward spiral of public debt so as to avoid further crises in public finance. The dominant European governmental response of 2010 has been to promise (or threaten) sharp public spending cuts, in the hope of reducing public deficits swiftly. This policy is an inevitable reaction to the massive public expenditure of 2009, such as the bank bail-outs. Many governments’ debt, already unprecedentedly high, will increase further (given, for example the ageing of Europe’s population which will entail both rising public expenditure and reduced tax revenue) unless costs can urgently be controlled. Yet the counter-argument is no less powerful. The “austerity package” entails raising indirect taxes such as VAT, and cutting social benefits as well as jobs and pay in the public sector, whilst private sector unemployment also rises. Meanwhile, to stimulate growth, or prevent “double-dip” recession, direct taxes will be lowered (a step that, in contrast to lowering VAT, favours the better paid). The public sector’s capacity will diminish when it is most crucial, at the point when social inequalities widen. Hardship for a growing minority will render the desired growth even more elusive, so that public debt, assumed at high rates of interest, will become even harder to repay. On this view, the austerity policy could be self-defeating. No government can simply opt for one of these policy-sets while rejecting the other. The tough choices, sometimes made tacitly, are: What kind of growth is to be encouraged, what type of austerity imposed? Responsible action could be electorally costly. As M. Jean-Claude Juncker once summarised the politicians’ predicament, “We all know what to do, but we don’t know how to get re-elected once we have done it”. The EU has an extra public relations problem. Amidst national spending cuts, the costs of the European institutions will rise inexorably. In the case of the European External Action Service, it is hoped that duplication with member states’ diplomatic services will be minimised. But the EU’s total diplomatic costs will clearly rise, and national media will willingly blame the EU. Ironically, other new institutions, the European Systemic Risk Board and separate bodies monitoring the banking, securities and insurance industries, are needed to manage the crisis itself. It seems that the EU will be obliged to join the member states in negotiating the tricky path between growth and austerity.

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