Is Austerity Dead?

In a very close election, French President Nicolas Sarkozy lost to challenger Francois Hollande today.

The French election result has huge implications for the eurozone and for the upcoming U.S. presidential elections. It’ll set the tone for future United States economic policy.

Hollande’s victory means French austerity ends.

Damn the debt, full spending ahead.

In Sarkozy’s gracious concession speech, he congratulated Hollande, thanked his own boisterous supporters and strongly called for French reconciliation and patriotism in the wake of the election results.

The U.S. Importance of Sarkozy’s Concession Speech

Sarkozy’s remarks are especially poignant given a contentious French election over a referendum on economic policy.

It prophesies sorely needed unity here in the U.S. after our elections, no matter who becomes president. The lame duck Congress will still have taxmageddon facing it this year.

The French election marks a European Spring of sorts.

The pendulum is swinging back from austerity to big government spending programs again, along with soaring sovereign debt.

People all over Europe are rioting. They demand their suffering stop. They demand that high-cost government social and retirement programs be reinstated. They demand  that corporations and wealthy individuals fund them.

At Stake in the French Election

Sarkozy joined forces with Germany’s Angela Merkel to require strict austerity measures be imposed on eurozone nations seeking an EU bailout. That highly unpopular policy evolved over the last two years.

The most famous European example of imposed austerity is the bailout of Greece. Spain, Ireland and Portugal have also been forced to cut government spending drastically to get EU bailouts of their sovereign debt. The EU restricts each nation state to no more than 3% of GDP in government spending.

The French election result will change all that. The French commitment to reduce government spending from 5.4% to 3% of GDP is history. Germany will now stand alone supporting austerity as the means to deal with the EU sovereign debt problem.

Germany will surely be forced to capitulate and go with the flow. The spending hawks have won.

Francois Hollande’s Winning Formula

During the French election campaign Hollande released a document with 60 propositions that should sound familiar to American Democrats and President Obama. Among them are:

  • Raise taxes for big corporations, banks and the wealthy
  • Increase government spending to stimulate the economy
  • Create 60,000 teaching jobs
  • Create 150,000 government subsidized jobs in areas of high unemployment directed at the young
  • Promote more industry growth by creating an infrastructure bank
  • Grant marriage and adoption rights to same-sex couples
  • Pulling French troops out of Afghanistan in 2012
  • Lower the official retirement age back down to 60 from 62

Back in late January when he made his proposals, Hollande said this:

I only make promises that I will be able to keep. Everything I say will be done.
– New York Times, 1/26/2012

Conclusions

President-elect Francois Hollande rode a wave of anti-austerity feeling to victory. That wave is sweeping across Europe in the wake of Europe’s financial crisis.

Many European and American economists applaud the change saying that big government spending is the only way to create enough demand to return a nation’s economy back to prosperity.

That is the message President Obama will take on the campaign trail in the coming months. He may point to Hollande’s victory in France as proof.

Francois Hollande, however, is a staunch socialist. He is the French Socialist Party candidate. He calls his set of proposals a manifesto.

The U.S. Democratic Party would never describe itself or Obama’s policies as socialist, yet the clear connection with Hollande is unmistakable. Whether that is good or bad is not known.

As it looks now austerity will likely be rejected here in the U.S. as it has been today in France.

Austerity may fade into temporary hiding for a feel-good spending binge, but it will always lurk behind the scenes as long as enormous debt remains.

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About azleader

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Posted on May 6, 2012, in 2012 Elections, austerity, culture, Debt crisis, economics, Life, news, Opinion, Politics, Taxes. Bookmark the permalink. 5 Comments.

  1. It will be interesting to see what happens to European debt, or rather French debt, once austerity is abandoned. Austerity was the chosen path of Europe for two main reasons: 1 The debt of European nations was greater as compared to GDP than the US and 2 because of the rules of the EU member states retain control of their fiscal policies but had to cede control of monetary policy. EU nations were limited in what their response could be. Austerity, I think, should only be used as a last ditch effort to avoid default. I do not know where France stands with their debt but if their situation is any thing like Greece or Portugal etc. then they may be better sticking with austerity, if not then abondanding austerity in favor of spending could be the better path, as long as they make the additional spending and have a plan to manage and eventually reduce the debt.

    • Right, of course, on both of Europe’s two main reasons. Those are big reasons to.

      I further agree that austerity should be a last ditch effort because it has the immediate effect of reducing demand which is exactly the problem you are trying to fix! It temporarily worsens a country’s economy until growing debt stops growing.

      I also believe that both Europe and the United States are at or very close to needing the last ditch measure.

      Both Europe and the United States would be wise to take preventative measures BEFORE they generate a crisis. Once the crisis happens there are few options left.

      • Basically all the nations that went on spending sprees using debt are doomed to massive unemployment by following austerity measures. So, austerity is really dumb when you are in the teeth of a depression’s grip. That is so brain dead obvious that it surprises me that the main stream media finds these European votes stunning. [But I forgot the MSM media is brain dead; as I have told you, your site is one of the best and you should have a syndicated column.] Banks get bailed out but the schmuck has to pay. Schmuck then votes out the leaders. Again, obvious. Corporate socialism for banks via bailouts but not for people–not a sustainable equilibrium, anywhere.

        The other course print money until you run out of paper, run negative real interest rates, debases your currency and its purchasing power, dooming the middle class to a slow bleeding that goes on forever until the middle class wealth is essentially wiped out. That is a really dumb policy too. We are following that course right now in the US. Try and tell me an investment that will return more than present 3% inflation. We live in a financial repression here. You will notice I did not say a hyper inflation would occur–there is just too much slack capital equipment and labor worldwide.

        But austerity or financial repressions with more deficit spending are our only choices. Both are Hobson choices. The next ten years will be tough, everywhere. But it will get better, it will. Why? Material goods like cars appliances etc all wear out. At the end of World War 2 there was so much pent up demand for real goods the economy exploded. It will again but not for some time. And if we could only control our tempers and armies, we could get there sooner, because you will notice when it comes to austerity, no one puts defense on the table.

  2. Its ironic that a country foolishly spends itself into oblivion to artificially generate a fiscal crisis, yet the only solution to fix it is to spend more still.

    I understand that Keynesianism is counter-intuitive but the missing link is that it ignores that debt cannot be ignored forever.

    Eventually, I believe, things get so bad that Keynesian fixes are insufficient to solve the demand problem before the country goes belly up. Then more drastic measures must be taken… defaulting loans and/or devaluation of currencies… stuff like that.

    That, perhaps, is what should happen with Greece and perhaps others.

    • 2-25 years ago, the period of time after Graduate School where Keynesianism was the main course for financial panics in my mind, I would have disagreed with your assessment. Now I agree completely with your analysis. Your reply should be sent to Paul Krugman because it is spot on. Keynes took a world with a trading system that did not allow for sustained trade deficits. Keynes made some remark that monarchs would not stand for it, and democracies would not either as it would hollow out employment. Yet that is the world we live in, sustained trade deficits too affecting capital markets. We live in a very strange world, and the standard anti-biotic economics is not working.

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