Austerity is not the answer to the crisis. It is an approach that is based on trying to cannibalise the present by trying to save or recycle existing resources.

Bring back the future

What is needed is a future orientated strategy which is based on productivity and growth. That is the only way out of this crisis.

Scrimping and saving to preserve, or bailout, failed institutions of Western societies, whether banks or states, is not going to work and has so far compounded the problems.

It is time to think about some creative destruction, away with the old and in with the new.

Europe’s sovereign debt crisis might well be manifested through irrational markets spasming in response to equally irrational political institutions but it does represent an objective problem.

European economies, long hobbled by low productivity and growth, are hit by recession and have been over burdened by non-productive activity, especially in the banking and financial sectors.

To put it bluntly, European economies are risk averse, in the red, over-valued and low growth – there is a objective risk for investors, especially when comparing Europe to other more dynamic parts of the world.

Wolfgang Munchau, writing for the FT, unpicks some of the destructive practices that have enmeshed European states with dodgy banks (also see my footnote on contingent debt here).

Like the “dodgy subprime collateralised debt obligations” that caused the banking crisis, he notes, the secretive Luxembourg based euro “SPV” bailout of two weeks ago has “substantive parallels” to the “notorious financial structures that brought us the subprime crisis”.

European states are using the same questionable and destructive financial practices that caused the crisis in desperate, and doomed, attempts to get out of a disaster of their own making.

It is not going to work. Like a “double or quits” loser each successive gamble just increases the debt burden and brings collapse closer.

The real strength of Munchau’s analysis is his appreciation that productivity and growth, not debt, is the real problem for European economies.

“Even a 150 per cent debt-to-GDP ratio would be feasible if the eurozone had an intelligent growth strategy. But it never did, and it still does not,” he writes.

Productive societies that create new wealth through high growth rates (creating exponential gains in resources) can carry and service debt (this is not to argue that high levels of borrowing on the sovereign bond markets or through expensive PFI schemes is a good idea).

Societies that have learned to live with sluggish growth, made a fetish out of stability and an ideology (environmentalism) out of the myth of finite resources are not able to meet their obligations. Europe needs something of a culture war to turn this around.

If the economy grows debt repayments are much less of a burden. It is simple: someone whose income rises finds paying back their loans easier.

More importantly, growth brings benefits (austerity only debits) such as rising living standards and innovation.

History has shown us that people will rally around a collective endeavour, even if it involves some sacrifice in the short term, if it means a growing economy and greater prosperity for the mass of the population.

Moreover, dynamic economies are marked by scientific development and technological innovation. Europe’s societies, tellingly, are marked by fear and hostility to scientific progress and new technology.

Led by Germany, but with Britain and the rest in train, Europe’s response to the crisis has been dominated by austerity, how to cut debt.

There have been no concrete proposals on how to promote long-term economic growth or innovation.

Two approaches – just two! – dominate the policy response, usually in a toxic combination for democracy.

The first is to squeeze consumption by increasing taxes, something that will lead to cuts in real incomes for most Europeans.

The second is to reduce public spending, especially on old social obligations (even if already paid for), again these type of measures tend to hurt the majority.

The EU’s discussion to date means that most people will suffer the effects of austerity for a crisis of financial and state institutions that was not of their making.

Europe’s elites are well aware of this and along with austerity will come measures to further insulate decision making and the state from popular accountability.

Decent holiday allowances, good childcare, proper health provision, rising living standards (consumption), a secular decline in pensionable age and a diminishing length to the working week will, our rulers tell us, be early casualties of austerity. These are things that generations of Europeans have worked (and paid) for.

Most of us regard such benefits, or aspiration to them, as a mark of civilisation. Should we roll over to allow decades of progress to be rolled back? Should our societies become less civilised because of this crisis?

We should reject austerity measures that compromise progress, while supporting public spending that is refocused on investment in reserach and infrastructure. Over on his excellent blog, Robert Killick has set out an interesting approach, which has pan-European relevance.

“The most effective way of opposing public spending cuts is to argue for policies which encourage faster economic growth,” he writes.
“A key element of pursuing faster economic growth is for the state to invest more public money in science and technology education, in the encouragement of research and innovation and in new infrastructure. This approach would involve some reorganisation and reprioritisation of public spending, away from consumption and towards investment. Most importantly, the government must generate enthusiasm for a more dynamic economy and society. This would mean challenging the risk averse, pessimistic and therapeutic aspects of British culture. It would mean rejecting the view that economic growth should be green and sustainable, all code words for slow. It would mean restoring the pursuit of excellence as a goal of society and it would aim to bring out the best in people.”

A big part of the problem across Europe right now is the ideology (across what calls itself left and right) that sees the crisis of capitalism as caused by excessive risk taking, consumption and growth.

To the degree that consumption growth in European societies ran ahead of rising output, it was only because growth was sluggish and there was not investment in the real economy and innovation.

Creative principles, allowing the old to be challenged because there are new things and possibilities coming into the world, are completely absent from discussion of the crisis among European elites.

In the post-war period, both right and left have become totally orientated around defending the status quo rather than looking to the future, something new.

Consequently, all mainstream political parties have embraced elements of environmental thinking, which regard growth as bad, resources as fixed and humanity’s innovativeness as primarily destructive.

To have innovation, old institutions and established ways of doing things must be allowed to fail, to be swept away by the new.

There are ideas out there. I am very taken with this Big Potatoes manifesto.

As its authors conclude: “It’s a moment to catch one’s breath, soberly reflect on what has been achieved by innovators in the past, and uphold what innovation could do in the future.”

European societies do need a shock. Not the negative impact of austerity measures to prop up the old but the creative shock of the new.