The Berlin Consensus

The finger-wagging Washington Consensus of the 1990s that prescribed market based reforms for crisis-ridden developing countries has been replaced in Europe by what we might call the Berlin Consensus that calls for austerity in the Eurozone countries in crisis. Regardless of the outcome of the Brussels Summit taking place today and tomorrow for the fate of the Euro (and you can vote on what you think the likelihood of the breakup of the currency is at CES’s Facebook page), austerity measures will be the order of the day.

Governments in Ireland, Greece, Spain and Italy are slashing budgets, subsidies and social programs  in order to try to bring deficits in line. The pain this will cause in terms of lower wages, higher unemployment and disrupted lives was made remarkably human by the Italian Welfare Minister, Elsa Fornero, who broke down in tears while announcing the austerity plans.

Yet in the slash and burn environment as countries race against the clock to assure markets that they are serious about getting spending under control, there is the danger that too little in these measure will focus on getting the country growing again or that untargeted cuts will destroy existing foundations for future growth. The Guardian’s analysis of  Monti’s budget in Italy, which cuts €30 billion, suggests that there is little that will stimulate growth.  Broadbrush cuts to higher education in Ireland, especially in science, threaten to undermine the high-tech infrastructure that has been crucial in attracting investment and skilled talent to the country for the past two decades, reports the Irish Times.

The human costs for long-term stagnation are also staggering.  El Pais reported today that Spain, at 31% has the highest percentage of overqualified labor in the EU, that is, people with university degrees who are employed in jobs that don’t require one. Ireland is second with 29%.  This inevitably leads to brain drain – indeed, highly skilled workers in the Iberian peninsula have been fleeing to emerging markets in their former colonies in Latin America and Africa where salaries and prospects are better. With youth unemployment rates near 50% in Spain and Greece and over 30% in Ireland, Italy and Portugal, the likelihood that these countries lose their best talent pool or that a lost generation is never really able to make up for the lost wages and experience (see the NBER paper on the long-term effects of graduating in a recession) is high. 
 

Without a better consensus on what kinds of austerity measures are necessary and what kinds of policies will set the stage for increased productivity and employment in the countries currently in crisis the Euro project is not viable.  All kinds of austerity plans will inevitably be painful but the point is not pain in and of itself; they need to be ones that decrease the imbalances in competitiveness of the northern and southern economies.  Otherwise, the Berlin Consensus, like the Washington Consensus that came before it, is doomed to fail.