The policies of fiscal austerity now being pursued throughout Europe have come under their strongest attack yet. Double-dip recession is eroding voters’ confidence that belt-tightening is the best way to recover prosperity. Elections in France and political upheavals elsewhere are tilting the balance of opinion among policy makers away from unwavering commitments to deficit cuts. More than ever, clarity is needed about where and which kind of austerity is needed.
Many forces buffet the world’s economies, and economic policies must be correspondingly nuanced. Simple-minded approaches to deficit-cutting will not do, and no single austerity policy is right for all countries. This is why the Financial Times has consistently given qualified support to the British government’s fiscal strategy while criticising the excessive zeal for deficit-cutting in some eurozone states and in the US policy debate.
Some commentators – many of them American, such as the economist Paul Krugman – condemn Europe’s fiscal consolidation strategies indiscriminately. There is no doubt that the direct effect of tightening fiscal balances is contractionary. But quite apart from the fact that long-term growth requires sound public finances, a lax fiscal policy also has two negative effects on short-term growth.