Austerity – what does that mean?

The term austerity has been used a lot of late. It’s defined as “difficult economic conditions created by government measures to reduce public expenditure.”

It’s often made to sound like an unpleasant medicine, which if taken early and swallowed hard, will produce the cure, and all will be well. That really is an over-simplification. Producing a cure requires an accurate prognosis, and the appropriate medicine. Explaining to the patient (the voters) what could happen if the disease remains untreated is also a good idea.

Simply reducing expenditure is not the solution.

South Africa provides a number of useful examples. In the early 1980s, the recession and economic uncertainty in the rest of the world caused investors to take refuge in Gold, South Africa’s biggest export commodity at the time. The Gold price rocketed, and while the rest of the world suffered, the South African economy boomed. The success had nothing to do with anything the South Africans were doing right, and a sensible government would have invested the money into building a competitive economy. Instead it did the opposite.

Faced with a strong currency, South African manufacturers asked for protective tariffs, and the government obliged. Instead of learning to compete, and letting the citizens of the country benefit from the financial windfall brought by cheap imports, South African manufacturers developed the habit of looking for protection. They became less and less competitive and some industries eventually withered and died.

Education, one of the best long term investments a country can make, was also suffering. A generation’s education was lost demonstrating against the scourge of apartheid.

Greece, Italy, Portugal and Spain all have industries that are protected. Their economies are becoming less competitive, even as the developing countries are reaping the benefits of their investments in education, and are challenging in markets once dominated by the developed world. The changes that the IMF and Germany have insisted on include removal of the protection of vested interests. The resistance from the powerful lobby groups was to be expected. The governments’ failure to explain that they were complicit in creating the economic imbalances has made the situation worse.

The Portuguese are quietly fixing things. Italy, under a technocratic government, was making good headway, but has recently hit resistance. Spain, with a plethora of challenges is triaging.

So, austerity becomes an easy catch-all phrase, and when the whole economy suffers, the interest groups motivate the uninformed electorate to rebel. They have. The outcome of the Greek polls, and the expected vote for a government with little understanding of the cure required is symptomatic.

The sudden European funding of the banks in Spain provides a hint that a Greek exit is expected soon.

The financial hardship that the Greeks will suffer will be unfair. But perhaps it will provide an incentive for the protected interests in Italy and Spain to prevent the same from happening to their fellow countrymen.

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