Austerity & the Lessons of 1919

I’ve never liked the word "austerity": It conjures up the world of Scrooge and Cruella Deville, of humourless Puritans and knuckle rapping schoolmarms determined to kill the least sign of enthusiasm before it gets out of hand. My childhood had its fair share of these characters, and I was familiar with the result.

In the wake of the 2008 U.S.-triggered financial crisis, the situation in Europe was serious. So, all agreed, a serious solution was needed. Once again, we heard the dreaded word, "austerity".

Heralded by European central bankers and heads of state, by German Chancellor Angela Merkel and then French President Nicolas Sarkozy, a programme was put into action that meant slashing national budgets, cutting state jobs and reducing social services, all understood to be the best way to clean up the finances of the heavily indebted economies of southern Europe and Ireland.

The intention was good enough: Reduce the debt and renewed economic vitality was sure to follow. But, as I said, even when the policy was first announced, it made me nervous. All along, there seemed to be a tone of knuckle-rapping: These countries had lived beyond their means. Now they had to pay the price. The Germans, in particular, repeatedly expressed an unwillingness to finance the profligacy of a Greece or a Spain.

Now, five years later, the repercussions of austerity have crippled Europe, where growth will probably not even reach the 0.1 per cent predicted in February. Even the Germans, less able to sell cars, are starting to feel the pinch, and Austria could well be at risk.

These risks have been all too clear to Ewald Nowotny, Governor of the Austrian National Bank, for whom the entire approach has been a misguided repetition of the attitudes and actions of the Allied Powers after World War I that paved the way for the Third Reich.

"The single-minded concentration on austerity policy [in the 1930s] led to mass unemployment, a breakdown of democratic systems and, at the end, to the catastrophe of Nazism," Nowotny told a startled audience in June 2012, in widely quoted remarks to a joint SUERF/OeNB Workshop on "Lessons from the Crisis".

"It is not about punishing children who have behaved badly," Nowotny went on. The severe austerity imposed upon Germany by the victors in the Treaty of Versailles led to mass unemployment and a breakdown of democratic systems, he reminded, opening the door to fascism and setting the stage for World War II.

Normally a man of measured statements, Nowotny’s sharper tone is credited with influencing the ECB president Mario Draghi’s promise in July to "do whatever it takes" to save the euro, including direct loans to national banks of eurozone members later that summer.

Looking down from his cloud, John Maynard Keynes must have been smiling.

The inventor of stimulus economics went to the Paris Peace Conference in 1919 as a deputy in the British Exchequer, close enough to watch in frustration the disaster unfolding before his eyes. He saw U.S. President Woodrow Wilson’s 14 Points forgotten as French President Pierre Clemenceau’s avenged French pride for the humiliations of 1871 and the British stood by.

In his influential book The Economic Consequences of the Peace written at lightning speed on his return, he detailed the failings of the Treaty of Versailles: There was nothing to provide for the economic rehabilitation of Europe, nothing to stabilise the new states, nothing to reclaim Russia, nor even to promote a "compact of economic solidarity among the Allies". It was a treaty negotiated not in the interests of peace, but rather to satisfy the personal political agendas of the individuals sitting at the table.

"The fundamental economic problem of a Europe starving and disintegrating before their eyes was the one question in which it was impossible to arouse... interest," Keynes fumed.

The danger, he went on, was the rapid deterioration of the standard of living of the European population. Then as now, many had no resources left, and were facing starvation.

"Men will not always die quietly," he wrote. "For starvation, which brings to some lethargy and a helpless despair, drives other temperaments to the nervous instability of hysteria and to a mad despair. These in their distress may [...] submerge civilization itself in their attempts to satisfy... the overwhelming needs of the individual....

In Europe today, people are no longer dying quietly. They will no longer accept austerity. When you kill enthusiasm, you have killed hope.