The Debate About Austerty Is Over

Angela Merkel said there will be no debate about a change in the agreements EU members have made about the austerity measures forced on the financially weakest nations in the region. “We in Germany are of the opinion, and that includes myself personally, that the stability pact cannot be renegotiated,” she told a press conference after the results of French and Greek elections were final. Merkel added, “Twenty-five countries have signed it, Greece and Portugal ratified it and Ireland is preparing for a referendum on it. I think the pact is right.” The decision has been made. Germany’s financial contribution to the arrangement was absolutely critical. The matter is closed.

A number of economists and politicians, including those in some of the nations that have had to cut government expenses, think the election of François Hollande as president of France could open the door to a reevaluation of stimulus as a better means to close budget deficits and attack the growth in the national debt of many countries. Hollande plans to rush to a meeting with Merkel as soon as it is practical and make the argument that Europe has turned against her position. Austerity, he will argue, already has caused several nations to fall into recession. But it is possible to refute that point of view. These recessions began in the fourth quarter of 2011, which means government expense cuts probably were not their cause. High unemployment and falling property values were the more likely trigger. That will not dissuade Hollande. Whatever the reason, these nations need stimulus money to keep them from recessions that could last for years.

One of the most powerful arguments for stimulus in Europe is that recession will create a “lost generation” of possible workers, particularly among people who are in their 20s. These people will not be consumers for some time because they will not be employed. National GDP growth in troubled nations, which rely to a great extent on internal consumer activity, will not recover. This will be another piece of Hollande’s appeal.

Merkel has at least two reasons to ignore Hollande, beyond the simple one, which is that she can. The first is that German voters are tired of paying taxes that go in part to aid nations they believe have entirely caused their own financial problems. Merkel needs their votes in next year’s national elections. The other reason is more basic. Merkel seems to actually believe that government cost cuts are a better means to lower national deficits than stimulus. Perhaps she thinks the argument for stimulus in general is flawed economically. More likely, she does not believe that nations that have already fallen into deep debt can be skilled enough to use stimulus dollars effectively to their advantages.

Merkel has veto power over any new set of agreements about the financial rescue of Europe. She has said, indirectly, that she will use it. The debate is over already.

Douglas A. McIntyre