Iten years ago, some economists, including myself, argued that the European Union, like the United Kingdom, was making a historic mistake. By prioritizing ‘fiscal consolidation’, better known as ‘austerity’, we risked paving the way for a period of low growth and stagnating wages that would wreak 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, nothing prevented advanced economies from borrowing and investing. Against this position, fiscal conservatives on both sides of the Channel, from Chancellor of the Exchequer George Osborne to then European Central Bank President Jean-Claude Trichet, warned of the risk of jeopardizing the market confidence, or even a default 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 like the IMF, is that we could and should have borrowed more, and that austerity has been in part responsible for the disappointing economic performance of 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.
Liz Truss’ failure has destroyed the credibility of a simplistic approach that tax cuts can put the economy back on the path to growth. But this failure is also invoked, in the United Kingdom and elsewhere, by conservatives who explain that the reaction of the financial markets proves that austerity was very necessary.
We have thus witnessed a strange convergence between the traditional left-wing 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 , of a libertarian right for whom the markets are “woke globalists” conspiring against a reformist liberal government!
Both are wrong. In the early 2010s, markets, as we argued at the time, “begged 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.
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