Reports that Spanish banks will be bailed out without a consequent austerity package have prompted Newsnight’s Paul Mason to describe this as a game-changer. However, he’s only thinking about the Euro crisis. If Germany really has turned, then the only government left to pursue aggressive austerity is the British.
It is fitting, in a way, since George Osborne Caused the Euro Crisis. He is the inventor and chief proponent of aggressive austerity. It is his baby. If he’d had no influence, then Europe would likely be in a very different situation today. It is worth looking back at how this came to be.
On the 2nd April, 2009, the G20 group of global leaders met in London to face the greatest economic crisis in almost a century. Six months previous, following the bankruptcy of Lehman Bros, Prime Minister Gordon Brown recapitalised British banks, a policy copied across the world which averted the collapse of the global economy.
However, the world economy still faced the likelihood of entering a slump. Brown diagnosed a lack of aggregate demand and proposed a $1.1 trillion stimulus package. With the backing of America and China, Mr Brown won the day, but only after Germany was out-voted, and reluctantly brought into the consensus.
The early stimulus period was a success, with Germany’s car scrappage scheme being copied elsewhere. However, it was in Britain where this delicate consensus was breached, when the Conservative Party won the 2010 General Election after campaigning on a policy of aggressive austerity. Germany immediately abandoned stimulus for austerity, and France followed. Any pretence of an international policy was abandoned. Europe would follow a separate path to America and the emerging economies. The achievement of Mr Brown, in bringing the world together, was abandoned.
No one disputes that there was a problem with debt in the EuroZone and elsewhere. It’s not in dispute that Greece would have faced painful reform, due to their unaffordable public sector wages. Nor is it in dispute that Ireland and Spain faced severe tests following the burst of their property bubble.
The issue at hand is whether aggressive austerity would give confidence to business, or cause growth to be stalled, and thereby compound the problem? The answer is that after two years of aggressive austerity, debt has increased due to demand being choked off. Mr Brown has been proved right and Mr Osborne wrong.
It is worth noting that prior to the 2010 election campaign Mr Osborne had achieved no notable economic credentials. He studied history at university, was known for being hawkish on foreign policy and keen to cut the size of the state. He served in the shadow treasury from 2004 where he explored the policy of a flat-tax system.
It is extraordinary that he leapt from these modest studies on tax, to become one of the most radical thinking chancellors of recent times. His main thesis was that by slashing back the state, business will be inspired to invest, and the private sector will mop up public sector workers. The thesis didn’t just fail, but produced the opposite result.
It is now apparent that Osborne’s theory didn’t come from years of observation and thought, but was plucked out of the air in order to suit the political needs of the time. This was not the credible theory of a brilliant man. This was the wishful thinking of an egotist, out of his depth, and acting way beyond his limitations.
In 2009 when David Cameron was asked whether or not he would be willing to sack a close colleague, such as Osborne, he replied, “With George, the answer is yes. He stayed in my shadow cabinet not because he is a friend, not because we are godfathers to each other’s children, but because he is the right person to do the job. I know and he knows that if that was not the case he would not be there.”
The time has come for David Cameron to live by his word.