Thursday, December 15, 2011

Winter of Discontent

One of the constant background murmurs in the Eurocrisis discussions has been the issue of how long countries subjected to austerity measures would actually be able to stick with a regime of cuts and other deeply unpopular policies.  That uncertainty is part of the argument of the Germans and the ECB against the latter buying the debt of countries like Spain and Italy. The fear is that governments will lose their resolve to institute reforms in the face of domestic public opinion, if they know the ECB will buy their debt instead of going to the market where rates could be punishing and unsustainable.

There are two problems with this argument.  The first is it’s not working: the markets are not responding as hoped for to austerity plans.  In Italy, despite Monti’s proposed  30 billion in cuts and taxes, rates at Wednesday’s auction of Italian 5 year bonds hit a new high of 6.47% which is closing in on unsustainable. And the secondary market for 10 year bonds exceeded the magic 7% figure, that which triggered bailouts for Greece and Ireland.

Second, and not unrelated, popular pressure against austerity is starting. In Italy, the leader of the largest trade union warned of a ‘social explosion’ as a week of protests and strikes begins while the rightwing Northern League disrupted Parliament in a show of obstructionism.  On Tuesday, French trade unions led some (small) protests across the country in reaction to the government’s austerity package.  The courts are also being used to halt some austerity measures.  The Guardian reports that the regional government of Catalonia is suing the newly elected Rajoy government for the return of ¾ of a billion euros in tax refunds that Madrid is withholding as part of its austerity plan.

Right now, there continues to be public support for the newly elected or installed governments to institute the austerity packages that are viewed as the only means of averting financial disaster. However, as the impact of the cuts is felt and if the hoped-for reduction in borrowing costs does not materialize making it harder for growth to resume, Europe, or at least parts of it, may be headed for a winter of discontent.

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