The OECD has called for less Austerity…Will Europe Listen?

By Dean Hochlaf

Since the 2008 financial crisis and subsequent economic downturn, Europe has pursued a course of vigorous austerity, in a desperate attempt to reign in government spending which spiralled after a series of high profile bank bail-outs. In Britain austerity is practically synonymous with Chancellor George Osborne.

In Europe, it is Wolfgang Schäuble, the indomitable German Finance Minister who best encapsulates the continents commitment to austerity policies. The fascination with austerity borders on the dogmatic. The Greek economy was decimated by austerity policies imposed by their creditors. Even when the IMF conceded restructuring of the debt was necessary, the European powers refused to yield. Now though there is another, unexpected voice amongst the chorus of opposition to austerity in Europe.

In the wake of renewed concerns over the state of the global economy, the Organisation for Economic Co-operation and Development (OECD) has suggested that wealthier nations should ease up on austerity and pursue more public investment. This echoes the sentiments expressed by Nobel Laureate Paul Krugman, and a host of other high profile economists, who have been extremely critical of austerity ever since it began to dominate the agenda for European policy makers.

The outlook for the global economy has been downgraded once again, and as several Central Banks begin offering negative interest rates, it is apparent monetary policy is not the most reliable way to aid economic recovery. Fiscal policy instead could be a much more effective way to stimulate demand and help improve growth performance.

Public investment can reap numerous benefits for the economy. Improving infrastructure can provide secure employment opportunities, while also improving state structures, such as transportation links, which facilitate growth. Recently released figures have shown that productivity levels in the UK are 18% below the G7 average. Concentrated investment from the government could help reduce this gap, which in turn will provide the state with the necessary foundations for further economic development.

Low global interest rates are also conducive for government spending. The cost of borrowing is at a historical low. If public investment is aimed at areas which will generate returns above the cost of borrowing, then this would be an economically optimal policy to adopt. The OECD has also noted the high multiplier effect that investment spending has for the economy. It is clear now that the fall in investment as a result of austerity was never compensated for by the private sector as hoped.

In essence, austerity deprives the economy of demand. For too long misinformation regarding how international finance works has been peddled by austerity zealots to justify their policies. In truth, controlled spending can improve infrastructure, reduce inequality and create jobs, all of which reap long-term economic gains through growth and productivity improvements. Growth can diminish the GDP to debt ratio in a far more sustainable and effective way than attempting to run a budget surplus.

There has already been an established academic opposition to austerity, but the OECD is an institution with the ability to seriously influence policy. If the world is about to enter another period of economic stagnation, it would be wise for Europe to heed this advice and repair their economies while the “sun is still shining”, because if we do not act now, the consequences of another slump could be even more devastating for our economic capabilities and future.