Austerity, debt and the Eurozone growth dilemma


By Alex Robertson
Mr. Cameron reported on Wednesday to the House of Commons on last weekend’s G8 Summit which included the Eurozone crisis on its agenda.  That report and the communiqué produced at the end of the summit made dismal and disturbing reading.
Apart from trite words of ‘motherhood’, little at all was agreed as to how to face up to what the Governor of the Bank of England has described as a “financial storm” and “the Eurozone tearing itself apart”.

The governments of Europe are split into two camps: the first (led by UK and Germany) saying the road to recovery is by reducing the immense sovereign debts run up over the last decade, and the second camp (led by France) saying the road to recovery is by stimulating growth, some even advocating further borrowing to fund growth, like the Project Bonds advocated by President Hollande.

That approach exposes the nub of the question.  How to fund the growth?  There is no Lender of Last Resort in the Eurozone, (fatal flaw) and austerity alone will almost certainly not prove a successful strategy – witness Greece and the turmoil in the streets arising from a population whose tolerance of severity has been exceeded.

Yet unless we find ways of funding growth without incurring more debt, there is a great deal of trouble ahead for us all, whether inside the Eurozone or outside.  The interdependence between banks in Europe, and wider, goes deep, and they have enmeshed themselves in a dense web of borrowing and lending to fund the unrestrained spending by governments and consumers alike.  Like a row of dominoes – if one falls, the others follow.

We live in times as dangerous as any since the days of Hitler and the Fascists.  Austerity alone leads to civil riots and rebellions, unredeemed by policies to stimulate economic growth, to supply jobs and relieve welfare budgets and increase tax revenues to pay off the mountains of debt lowering over us all.

We must get this right.  Because if we don’t, then the Eurozone will see first the exit of Greece, orderly or otherwise, which will hit the UK just as hard as any other country, and after that the exit of others, Spain, Italy, Portugal, Belgium all being possible candidates.

What results from that is devaluation of the restored national currencies and a sudden plunge into protection of domestic economies.  The road after that declines rapidly and steeply towards the breakup of the European Single Market.  That would be a total catastrophe: trade wars nearly always lead to real wars.

So the question remains: how do we fund growth without incurring more debt?  Mr. Salmond has spoken often about the urgent need to release emergency contingency funds, either treasury reserves, or in the case of the EU, the Structural Funds which hold billions.  What would also help, he has said, would be the restructuring of taxation to stimulate economic activity and growth, like abolishing the Air Passenger Duty to encourage business, reduction in corporation taxes.

There is a need for innovative and imaginative means to nurture growth, stimulate job creation and get the economy moving again, all without borrowing a single penny more.  Much depends on it.

The one person who has been right all along in the UK is Mr. Salmond.  What a pity that his voice cannot be heard round the tables of the EU in Brussels, let alone in the corridors of Whitehall.