Kemal Dervis writes: Over the last five years, the eurozone has, without explicit popular consent, maintained a strict policy focus on fiscal austerity and structural reforms – despite serious social repercussions, not only in the Mediterranean periphery and Ireland, but even in a “core” European Union country like France. Unless eurozone leaders rethink their approach, the radical Syriza party’s success in Greece’s recent general election could turn out to be just one more step toward a future of social fragmentation and political instability in Europe. Or it could mark the beginning of a realistic and beneficial re-orientation of Europe’s economic strategy.
Of course, fiscal sustainability is vital to prevent a disruptive debt refinancing and inspire confidence among investors and consumers. But there is no denying that it is much easier to support fiscal austerity when one is wealthy enough not to rely on public services or be at serious risk of becoming mired in long-term unemployment.
For the millions of workers – and especially young people – with no job prospects, fiscal sustainability simply cannot be the only priority. Austerity-induced suffering is particularly extreme in Greece. Severe pension cuts are preventing the elderly from living out their lives with dignity. A large burden has been placed on those who actually pay their taxes, while many – often the wealthiest, who long ago stashed their money abroad – continue to evade their obligations. Health care has lapsed, with many cancer patients losing access to life-saving treatment. Suicides are on the rise.
Yet Greece’s creditors have continued to ignore these developments. This is clearly not sustainable – a point that former Director of the International Monetary Fund’s Europe Department Reza Moghadam recognized when he recently called for writing off half of Greece’s debt, provided an agreement can be reached on credible growth-enhancing structural reforms.
Social sustainability is essential for long-term economic success. Regardless of what today’s corporate profit reports and stock indices may show, a country cannot achieve inclusive, sustainable success – in economic or human terms – if these fundamental social issues are not adequately addressed. Of course, fiscal caution cannot be abandoned; after all, if governments or the private sector were to spend borrowed or newly minted money freely, the result would simply be more crises, which would hurt the poor most. But social sustainability must be an integral part of a country’s economic program, not an afterthought.
The persistent tendency to pay lip service to social sustainability, while implementing economic programs focused on unrelenting austerity, is a leading cause of political instability in Europe. Though reform programs aimed at building viable macroeconomic frameworks remain essential, they must include strong provisions for countercyclical policies to offset the “paradox of thrift” (the tendency to save more during a recession, undermining economic growth). When aggregate demand falls short of aggregate supply, governments must increase public spending.
The European Commission and the IMF have admitted their errors – not only the inaccurate macroeconomic forecasts on which the Greek program was based, but also the decision not to account for social sustainability – and have acknowledged that the program has not produced the expected results. Yet, for some reason, Greece’s creditors refuse to negotiate with the new government (which enjoys strong domestic support) to develop a new program that incorporates debt relief, a lower fiscal surplus, and structural reforms that support growth and promote social cohesion. This must not continue.
The last five years have underscored the challenge of achieving financial stability. But political and social stability have proved to be even more elusive. Policymakers must direct just as much effort and resources toward realizing social sustainability as they do toward getting the Basel III financial reforms right. Europe’s future prosperity – and its global role – depends on it.
