Even Angela Merkel now seems to agree that austerity has run its course. When Italy’s prime minister, Matteo Renzi, together with other European leaders, led a fresh charge against the ill-fated policy after the European elections, Berlin caved in surprisingly quickly.
The details remain to be worked out but it seems certain that the conditions of the stability pact will be softened. Most likely a deal will be cut by which investment expenditure for structural reform will not count anymore towards the restrictions imposed by the agreement. This would give crisis countries substantial leeway to increase government spending and stimulate their economies.
Should critics of austerity feel vindicated? There can be no doubt that this represents an important policy change but it may be too early to celebrate. After bungling austerity, European leaders now seem poised to make a mess of its end.
Less than 24 hours after Merkel’s spokesman had made the German green light public, Renzi delivered a major policy speech outlining his vision for the upcoming Italian presidency of the EU. Most importantly, he asked for more financial flexibility and announced a series of structural reforms, including changes to labour market regulations. In the speech he explicitly cited Gerhard Schröder’s reforms as a model for Italy and others: “Germany has been able to face today’s crisis better and more successfully than any other country because of the extraordinary reforms initiated by Schröder.†This was not merely a gesture of courtesy to Berlin. Renzi’s plans resemble Schröder’s 2003 agenda in important respects.
Surplus requirements
The German chancellor had used a two-pronged approach. His government increased public spending and the resulting economic upswing gave him leeway to go ahead with structural reforms. New legislation deregulated parts of the labour market and put pressure on the unemployed by reducing benefits and introducing penalties for those refusing to accept jobs that were offered to them. The reforms allegedly helped to keep German industry competitive and made possible the substantial export surpluses that drive German growth.
