Barroso's message on austerity has not changed much

By Sean Whelan, Economics Correspondent

“The Commission does not believe that cutbacks are the solution to Europe’s challenges. But, yes, sound public finances are an essential part of sustainable growth”.
– Jose Manuel Barroso, Friends of Europe Roundtable, October 2011

“For some, the main consideration is the need for stability. For others, it is growth. I say we need both.”
– Jose Manuel Barroso, State of the Union Speech, November 2011

“I believe those who want to over simplify the situation putting it as a kind of an option between austerity and growth are completely wrong. We need sound fiscal policy. We need deeper reform for competitiveness and we need investment, namely with a social dimension.”
– Jose Manuel Barroso, Q&A session, European Think Tank event, April 2013

Spot the difference? Me neither.

Some people think what Barroso said at a policy wonk event in Brussels this week represents a sea change in Troika thinking on austerity.

The policy has reached its limits, we are told – implying that there can be no more of it, which implies further that there must be some kind of big fiscal stimulus, a reversal of policy in the bailout states for a start.

It fits with the other economic noise out there – the Ashoka Mody interview on Morning Ireland, The Rogoff and Reinhart embarrassment over debt/growth research. And the IMF ninth review of the Irish programme, which called on the EU to give more debt relief to Ireland by using the ESM to take over the pillar banks.

But are we just seeing and hearing what we want to, and ignoring the bits we don’t like?

Are we then blending these selected highlights into a narrative that comforts us, because it implies changed external circumstances that mean we won’t have to confront difficult internal situations like the Croke Park 2 votes?

Understandable, as the commission cites adjustment fatigue as one of the three big risks to the Irish a bailout programme. The IMF issued the same warning the very day Croke Park was voted down by the unions.

Let’s have a closer look at the Barroso “U-turn” on austerity.

In the Q& A session he was asked about people losing faith in the EU institutions’ ability to take action to deal with the crisis and, as you would expect, he defended the Commission and said decisions are made by member states, who after all were the ones who messed up in the first place.

“Now, having said this, I know this will also not respond to the concerns of the unemployed citizen in Greece or Portugal or many other countries we could quote. That is why I also think that we are reaching the limits of the current policies.

“The current policies are of course appropriate in terms of reducing the biggest challenge that we have today which is the challenge of unsustainable debt, public and private, the need to deleverage, the need to put Europe on a sound footing so that Europe can be more competitive and can have growth again, but growth that is sustainable, because what we have learned, and this is for me the biggest lesson of the crisis, and I think a lesson that we have not yet all completely drawn, is that growth based on debt is not sustainable.

“Growth based on unsustainable public or private debt is artificial growth and what we need is to have growth that is sustainable, namely based on increased competitiveness in Europe. This is what we need. This is the greatest lesson to draw from the crisis.”

“So while this policy is fundamentally right, I think it has reached its limits in many aspects, because a policy to be successful not only has to be properly designed. It has to have the minimum of political and social support.

“I know that there are some technocratic advisors who tell us what is the perfect model to respond to a situation, but when we ask how we implement it, they say that is not my business. This cannot happen at European level. We need to have a policy that is right. At the same time we need to have the ways, the means of its implementation and its acceptance, the acceptability, political and social.

“This is where I think we have not done everything right, responding directly to your question. We have not been able collectively, the European institutions, the Member States, to explain really what was at stake and to build the necessary support.”

So they haven’t explained themselves properly. Again, what’s new?

But this stuff isn’t easy – and if your personal finances are being hammered by the recession/tax rises/spending cuts/property crash do you really give a fig about the co-ordination and timing of fiscal consolidation policies in the European Union?

Of course you don’t – and there’s no reason you should. But the communication of the big ideas around how to handle the crisis has been lousy by pretty much all the key actors, starting with national government, but extending to the Commission and the ECB as well.

The IMF, with more practice and no pesky political interference, have been a bit more skilful, but all could benefit from a joined up, dumbed-down, constantly repeated message about the need for both consolidation in some countries as a matter of urgency (Ireland among them) and the need for pro- growth measures, including spending actual money, in other countries.

Except that not all governments are signed up to this master plan for economic salvation (yes Germany, we are talking about you). Or if they are, they’re not saying, especially this close to a general election (though in most countries, governments tend to cut loose with the spending in the lead in to elections – in Germany they just seem to cut).

But back to Barroso. He insists the bird never flew on the one wing of austerity….

“ The Commission has never and will never propose a policy that is only based on the correction of the deficits. This is certainly a difficult policy to implement, because we believe that without correcting the imbalances in public finances, we will not have confidence and without confidence, we have no investment. And without investment there is now growth. But our response to the crisis, our policy proposals, has always been a comprehensive response. It is the structural reforms for competitiveness,”

“Politically and socially, one policy that is only seen as austerity is of course not sustainable. That is why we need to combine the indispensable, I underline indispensable, correction of the disequilibria in public finances, namely huge deficits, huge public debt, fiscal rigour, this is indispensable, we need to complement this with proper measures for growth, including short term measures for growth, because we know that some of those reforms take time to produce effect. “

“Now, this is indispensable, but it has to be complemented by a stronger emphasis on growth and growth measures in the shorter term. We have been saying this, but we should say it louder and clearer. If not, even if the policy of correction of the deficit is basically correct, we can always discuss the fine-tuning, the rhythm or the pace, but that will not be sustainable politically and socially.”

And when confronted with the “austerity isn’t working” question/slogan, Barroso reached for the poster child.

“You said this policy is not producing results. I am sorry, we have to see that case by case. Ireland is going back to growth, it has positive growth. It is one of the very few countries that has positive growth today in Europe and they have been implementing one of the toughest programmes of adjustment and they are also already now in positive territory in terms of employment. So, can you say that the programme is not working? It is a painful programme certainly, but you cannot say it is not working.”

This two handed approach to the economic situation – on the one hand correcting unsustainable public finances, on the other hand getting growth going again – isn’t particularly new.

Here is another section from the 2011 State of the Union address to the European Parliament.

“…..significant growth in Europe is not an impossible dream….. We have done it before. We must and we can do it again.

“It is true that we do not have much room for a new fiscal stimulus. But that does not mean that we cannot do more to promote growth.

“First, those who have fiscal space available must explore it – but in a sustainable way. Second, all member states need to promote structural reforms so that we can increase our competitiveness in the world and promote growth.”

In other worlds; Germany should spend more, and the periphery should do something about competitiveness, mostly through structural reforms.

What’s new?