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"EU needs austerity and reform, not spending"

15.03.2013 - Interview

The European Union must find the political strength to continue our course towards a policy of stability.By Guido Westerwelle.

The European Union must find the political strength to continue our course towards a policy of stability. Tribune by Guido Westerwelle published in the Financial Times of 15 March 2013.

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In the wake of the elections in Italy, some people are trotting out an old theory: that it was not homegrown problems that produced this election result, but a unilateral austerity policy imposed from outside. This austerity course, they say, has now been rejected. Growth, according to that thinking, can be created easily through spending programmes financed by borrowing.

But this is wrong on two counts. First, the eurozone countries hardest hit by the crisis have, despite hardships, elected governments pursuing sound policies for stability. That goes for Spain and Portugal as well as for Ireland and Greece. The new government in Cyprus has also announced structural reforms. And in Italy even Silvio Berlusconi supported Mario Montis reforms, albeit late and halfheartedly.

Second, claiming a choice has to be made between austerity and growth may work as a political slogan, but it doesnt describe real alternatives. Anyone who argues that austerity and growth are irreconcilable opposites also claims that growth can only be produced through new borrowing. But we have known for a long time that state spending on credit can at best produce a flash-in-the-pan stimulus; it doesnt provide a basis for a sustainable upswing. Whats more: if borrowing keeps rising, the moment of truth will arrive sooner or later when the markets, as creditors, lose confidence in the sustainability of the debt. After all, theres nothing worse for a state than to end up dependent on the financial markets.

This year could be the most difficult of the crisis for Europe. Its true that reforms are showing the first signs of success. There is new confidence in the markets, and the budget deficits and imbalances within the eurozone are lessening. But it takes time for these harbingers of an upswing to be felt in the real economy. The eurozone is still stuck in recession. In some countries youth unemployment has risen to intolerable levels.

In fact, Europe faces a choice: either it continues its carefully balanced combination of solidarity, growth through increased competitiveness and budget consolidation; or it tumbles back into old debt-making policies that failed.

This would be fatal because there is indisputably a connection between sound financial policy, growth and employment. Today the highest unemployment levels are recorded in those countries where insufficient attention was paid to the rules of solidity because no one is investing there. So anyone who falls back into the old patterns of borrowing wont be making anything better, but will be cementing mass unemployment for years and decades to come.

There is no short cut to improve competitiveness even if the chosen remedy is a bitter pill to swallow. We Germans, too, know this first hand. Getting the right combination of reforms is crucial. They need time, but they work. It is equally important people do not lose faith in the remedy. That is why tackling unemployment has to be priority on the European agenda. Being jobless is a tragedy for the individual and unemployment is a tragedy for the economy as a whole. No country can afford to waste the working capacity or inspiration of its people.

Reforms aimed at modernising the labour markets and promoting labour mobility remain the priorities. Further investment in education and research is also indispensable. Germany can help through close co-operation on vocational training. Companies throughout Europe that want to create jobs should be given help in the form of easier access to the credit markets. Development banks such as the European Investment Bank play a key role.

A permanent pursuit of reforms is needed across Europe. Of course, that imperative does not stop at Germanys borders. We were better off than many of our European partners and still are because we engaged early enough in tough and painful reforms and because we started fiscal consolidation in the beginning of 2010. Thus, Germany did not fall prey to the psychological maelstrom of the debt crisis.

However, it would be a grave mistake to believe that Germany needs no further reform. We should remember Germany was considered the sick man of Europe just 10 years ago. That is why the German government works hard to achieve sustainably healthy public accounts including a federal budget without any deficit in 2014 and strives to improve competitiveness while strengthening domestic demand and attracting qualified young Europeans into our labour market. We know in the long run the German economy cannot prosper if our European partners are not doing well.

The European ship is now at a critical position. We have cleared the most dangerous cliffs, but have not yet reached safe harbour. We must not squander the trust we have regained. We must find the political strength to continue our course towards a policy of stability. Holding course will pay off in the long run.

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