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Austerity not an option

Roberto Lavagna, Buenos Aires, December 2014
Economic policies –and thus social policies too – are often presented as inevitable outcomes, when facing certain circumstances. Those who tend to support the inevitability of such responses are members of formal and informal coalitions –more precisely ‘powers’ – which bring together multilateral organizations (the IMF and the World Bank) with local orthodox economic and conservative actors with both international and local financial interests (in the wider sense of this term).

When faced with macroeconomic imbalances, economic adjustment (austerity) policies are often promoted. These reduce public spending (even social and infrastructure spending); they lower both wages and pensions; they increase foreign debt, and they attempt to limit economic policy instruments (for national governments) to the bare minimum. This is exemplified in the case of Greece whose evolution since 2008, when the Greek crisis began, indicates that national income or Gross domestic Product (GDP) is still 33% down (six years later).

Certain countries, however, have been able to address imbalances and reorient their economies using policies from both orthodox and non-orthodox (heterodox) economic schools taking the basic premise that rebalancing is impossible without sustained growth as a starting point. Fiscal order and debt reduction are only possible with a combination of growth and structural changes (for example the restructuring of foreign debt). In the Argentine case, after 2002 (the last crisis) Argentina achieved sustained growth so that six years later GDP had bounced back a cumulative 42% from the crisis low point.

This type of austerity –in our example the model which has been imposed on Greece – has risks which are to be found in long periods of decline, with negative social effects and a loss of the political legitimacy of democracy.

The expansive model, that which Argentina offers, is not without its own risks which are the associated with the rise of “populist” policies, redistribution of income without productivity, which again destroys the macroeconomic balance and ends up putting the brakes on growth and affecting low-income sectors; again with loss of democratic legitimacy.

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In the case of Greece risks are associated with policy persistence. In the Argentina’s case risks emerge from ‘abandoning’ policies, as happened in Argentina beginning in 2007. In neither case this second phase of post-crisis programmes is inevitable. Neither is Greece obliged to continue with policies that have not worked out, nor was it necessary for Argentina to abandon that which had already worked.

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Photo Credit: Graffiti, Greece;

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