We’re All What?

Is John Keynes smiling?

Across Europe political parties implementing austerity measures are struggling. In France Socialist candidate Francois Hollande was elected to replace the incumbent Nicolas Sarkozy. In Greece the parties that backed the current austerity regime saw losses,. The Euro is falling; but European stocks have been stable. What’s happening?

The arrival of a pragmatic socialist in France may not be the disaster that many fear. Cutting spending during a downturn is pro-cyclical: it amplifies the economic cycles that are already taking place. During a bond-market crisis a country may have little choice, and Greece might find out how bad things could really become if the IMF and other Europeans cut them off.

But France is a different matter. It’s the continent’s second largest economy and fifth largest in the world. The country is in a mild recession, and unemployment is at almost 10%, with youth unemployment much higher. In the US we have long recognized that it’s not a good idea to raise taxes or cut spending in a recession; in that sense, we’re all Keynesians, now. But the cutbacks in Europe haven’t yet produced the business-led “crowding in” of investment spending that austerity advocates were anticipating, and so voters have opted for another approach.

To be sure, if governments start confiscating assets and nationalizing industries that will be bad news for their markets. But European stocks are already valued conservatively, as if they face a sustained recession going forward. And history doesn’t repeat itself. The challenges of the last decade will not be the challenges of the next.

It may be that a period of “kinder, gentler” socialism will provide some stability to the European political economy. And if Europe stabilizes, that will be good for the Euro and the rest of the world as well.

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