Four years ago, European governments had to make a choice: do we deal with the economic crisis through more government spending (stimulus) or through government budget cuts (austerity).
Conservative governments were in power in Britain, France, and Germany. In Britain, Prime Minister David Cameron pushed through a tough package of austerity measures that matched his conservative partys ideology that the less government interference in the economy, the better. In France, Nicolas Sarkozy did the same, followed by Angela Merkel in Germany. Although none of these countries had the deep public debts of Greece, Ireland, or Iceland, the problems in those southern European countries gave the conservative politicians in the larger European nations an excuse to impose cuts in social welfare programs and pass anti-union legislation.
Last week brought a major pushback from the voters in those countries. In France, Nicolas Sarkozy lost the presidency to Socialist Francoise Hollande who remarked, Austerity need not be Europes fate. Hollande promised to renegotiate the budget discipline treaty signed by 25 European leaders in March, a treaty that was meant to enshrine the policies that have plunged Europe even deeper into economic recession.
In Britain, local elections on May 3rd brought tremendous gains for the Labour Party, which had its best showing since 1997. Labour won 800 seats, while David Camerons Conservative Party lost 400 seats, sending his constituency into a uproar. British voters deserted the two main parties (Conservative and Liberal Democrat) and voted overwhelmingly for Labour and a host of third parties.
The same was true of the May 13th local elections in Germanys most populous state, Northern Rhine-Westphalia, where Angela Merkels conservative Christian Democrats took only 26% of the vote, the partys worst showing since World War II. The center-left Social Democrats took nearly 39% of the vote and will form an alliance with the Green Party, which took a little more than 12%. Other recent local elections in Germany have brought similar results, an ominous sign for Angela Merkel, wholl be up for re-election in 18 months.
Its impossible to view these elections as anything other than a public referendum on austerity measures. It erases the excuses the conservatives have been using for the past four years that economic stimulus programs are politically unpopular. The voters have voted according to their pocketbooks, and the conservatives have lost.
History has given us many examples of how politically unpopular austerity measures are. Leaving aside the historical fact that austerity measures imposed during an economic downturn only lead to a worse downturn, as the United States discovered during the Great Depression of the 1930s, we need only look at the failure of neo-liberal economic policies on developing nations.
The 1960s and 1970s were a boom time for banks lending money to developing nations, many of which had just broken free from colonial governments. New, independent governmentssome of them democratic, some of them notwere able to tap a flood of development money. It was the Cold War, and the U.S. and Western Europe wanted to buy allies wherever they could, and banks saw an opportunity to make a profit issuing sovereign debt at high interest rates. But the money also came with political and economic strings attached.
Developing nations had to agree to liberalize their economies. They had to remove trade barriers and labor protections, do away with limits on foreign investments in their countries, and use the money to build infrastructure that benefited multi-national corporations, like roads, port facilities, railroads, pipelines, and even factory shells. But all of this investment didnt bring the economic gains these nations hoped for. Profits were taken home by U.S. and European corporations, and the wages paid to local workers remained too low.
Eventually, the loans came due. In the 1980s and 1990s a wave of developing countries were forced to restructure their debts. The International Monetary Fund imposed round after round of austerity measures on many countries, only to see those nations sink deeper into economic recessions. A wave of nations began to default on their debts, including Egypt, South Africa, Mexico, Brazil, and Argentina. In fact, the Latin American Debt Crisis of those years led to what is commonly called the lost decade: a time when real wages across the region dropped 20-40% and Latin American economies showed negative growth of 9%.
So the results of last weeks elections in Greece came as no surprise. The two main parties that had negotiated Greeces debt restructuring and austerity measures failed to take enough votes to form a coalition government. Greek voters deserted in droves to third parties, especially the far-left party Syriza, which campaigned on the platform of revoking the austerity measures and imposing a moratorium on Greeces debt payments for three yearsa technical default on their sovereign debt.
None of Greeces parties won a majority, and no two parties won enough votes to form a coalition government, so unless a miracle occurs, new national elections will be called in June. When Greece finally forms a new government, the pressure to default on its loans and withdraw from the European Union will be impossible to resist.
Default was obviously the only choice for Greece from the beginning, but conservative politicians chose to ignore historical fact and impose the pain of austerity measures instead. And now theyre earning their just desserts at the polls.