ITen years ago, some economists, myself included, argued that the EU, like the UK, made a historic mistake. By prioritizing ‘fiscal consolidation’, better known as ‘austerity’, we risked paving the way for a period of low growth and stagnant wages that would cause economic and social damage (‘No debate please, we’re Europeans’, National Institute of Economic and Social Research, 6 March 2013). We also argued that with historically low long-term interest rates, there was nothing to stop advanced economies from borrowing and investing. Faced with this stance, fiscal conservatives on both sides of the Channel, from Chancellor of the Exchequer George Osborne to then-President of the European Central Bank Jean-Claude Trichet, warned of the risk of jeopardizing market confidence, or even defaulting on sovereign debt.
What followed proved us right: the intellectual consensus, not only among academic economists but also in central banks and international financial institutions such as the IMF, is that we could and should have borrowed more, and that austerity has been partly to blame the disappointing economic situation. results in many European countries. This has had the indirect consequence of contributing to the political dysfunctions of recent years, from Brexit to the rise of xenophobic populists in France and Italy.
The failure of Liz Truss has destroyed the credibility of a simplistic approach where tax cuts can put the economy back on the path to growth. But this failure is also invoked, in the UK and elsewhere, by conservatives who explain that the reaction of financial markets proves that austerity was badly needed.
We have thus witnessed a strange convergence between the traditional leftist narrative – according to which the “markets” are Anglo-Saxon speculators ready to collude to undermine the economic ambitions of any progressive government, however moderate – with the even stranger, by a libertarian right for whom the markets are “woke globalists” conspiring against a reformist liberal government!
Both are wrong. In the early 2010s, as we argued at the time, “asked us to borrow and spend”. Neither large deficits nor the downgrading of credit ratings prevented long-term interest rates on British and French government debt from falling steadily for most of the decade.
You have 44.27% of this article left to read. The following is for subscribers only.