In prescribing a cure for Europe’s economic woes, we might remember the lyrics of the song “A Spoonful of Sugar Helps the Medicine Go Down.”
Bob Sherman, the lyricist for “Mary Poppins,” said he was inspired by his children’s experience; to get them to take the Sabin vaccine to prevent polio, it was put on a cube of sugar.
On April 29, Christina Romer, former chairwoman of President Obama’s Council of Economic Advisors, made suggestions in a New York Times article entitled “Hey, Not So Fast on European Austerity.”
She encouraged Europeans to “pass the needed austere budget measures now, but phase in the actual tax increases and spending cuts only gradually.” The technical term for this is back-loading the remedies.
She advocated specifying when the measures will take effect — either along a set schedule or tied explicitly to indicators of economic recovery. By delaying the reduction of benefits or the implementation of tax increases, Romer would sugar coat the economic remedies.
Romer wrote that growth is the ultimate cure for Europe’s woes, and she argued for tax increases and budget cuts to be phased in after European economies start to recover.
Romer gave historical examples of back-loaded plans that worked.
She cited the 1983 Social Security amendments. This tough reform involved higher taxes and increased retirement ages. The sugar-coating was the phasing-in of these measures over three decades.
In 1985, Sweden cut its budget deficit by 8 percent of gross domestic product. To minimize disruptions, it implemented the fiscal remedy over three years.
She argued that this plan also makes the tough decisions more palatable for politicians. Once the legislation is on the books, politicians have little incentive to change it because the remedy takes place over a long time and the sting of sacrifices is muted.
The outcry against austerity has influenced European Central Bank president Mario Draghi, who recently said he wants to institute policies that reignite growth and to refocus the ECB beyond its current mandate to just achieve price stabilization.
Francois Hollande, the favorite to win the French presidency next week, said leaders across Europe were awaiting his election to back away from German-led austerity. Hollande’s election would likely weaken the German-French axis that has provided leadership during the continent’s fiscal crisis and undermine confidence in the eurozone’s future.
Three indicators show the eurozone’s health has worsened: economic growth, unemployment and debt burdens.
The International Monetary Fund says the eurozone’s economy will shrink by half a percent in 2012. Unemployment for the entire eurozone in February was 10.8 percent, up from 7.2 percent in February 2007. European deficits have expanded rather than declined. Debt-to-GDP ratios have continued to rise in almost every eurozone country.
The eurozone is at a cross roads. On the one hand, policymakers need to rein in their unsustainable fiscal deficits. On the other hand, Europe’s current austerity measures have increased rather than reduced government deficits. Budget cutbacks raise deficits because the unemployed receive unemployment benefits rather than pay taxes.
Europe’s treatment for its economic ills has felt more like bloodletting than taking the Sabin vaccine. Angry voters in troubled countries want their politicians to implement growth strategies rather than implementing more austerity measures.
Alternatively, the citizens in Europe’s financially stable countries have voiced increasing frustration over doling out money to keep the weaker countries from insolvency.
And withdrawing from the euro is not a cure. It would cause huge losses for banks, international financial institutions and governments.
No, what Europe needs is a sweetener to get the opposing factions to compromise. Policymakers should entertain Romer’s strategy of phasing-in tax increases and budget cuts, moderating the pain that will accompany fiscal reforms.
Originally published in the Sarasota Herald-Tribune
