August 24, 2010
Last spring, European nations reluctantly began reining in government spending as part of austerity measures meant to assure investors of the euro zone’s viability. Leaders from Madrid to London knew that, in time, drastic spending cuts would be necessary, and they knew it wouldn’t go down easy. The riots and strikes in Greece could have spread throughout Europe as people used to retiring at age 61 with full benefits realized their entitlements might be cut back.
Powerhouse Germany and debt-ridden England have instituted sweeping financial reforms that are reshaping the way their citizens live and the way their leaders govern. Before the cuts were made, The Fiscal Times wondered what a new austere Europe would look like. Now we have a sneak preview.
No country has undergone more radical change in the Age of Austerity than Britain. Voters ousted liberal Prime Minister Gordon Brown and replaced him with conservative David Cameron. In just a few short months, Cameron has made his presence felt by announcing sweeping spending cuts in order to trim England’s ballooning $1.3 trillion debt.
Under Cameron’s plan, Britain’s value-added tax will increase from 17.5 percent to 20 percent. A two-year public sector pay freeze was instituted, and welfare benefits are being slashed across the board. Cameron has also disbanded a committee charged with exploring the possibility of the U.K. joining the euro zone, ending any hope that Britain, along with Germany, could become a strong backer of the common European currency.
Perhaps Cameron’s most dramatic action was to slash the size of Britain’s bureaucracy, a change he’s dubbed “The Big Society.” According to The Washington Post, as many of 600,000 public sector jobs — or one in 10 — could be cut by 2015. These cuts are part of a larger plan to shrink the size of Britain’s government while putting more of the responsibility for everyday life — including public safety, schools and health care — in the hands of local communities. The plan would also drastically alter Britain’s role in the war in Afghanistan, as the U.K.’s Defense Ministry is planning to cut some $14 billion in spending. This decrease could lead to a lessened commitment of British forces in the region.
“The Big Society is about a huge culture change, where people, in their everyday lives, in their homes, in their neighborhoods, in their workplace, don't always turn to officials, local authorities or central government for answers to the problems they face,” Cameron said last month.
Critics say that Cameron’s cuts could lead to a second recession and increased job losses, and the opposition Labor Party has seized on these concerns to start building a campaign against Cameron. Yet approval ratings for Cameron’s Conservative Party — which remain around 40 percent — are the highest among British political parties.
While there hasn’t been a change in power in Germany, Chancellor Angela Merkel’s power was weakened by losses in local elections last May. She now finds herself struggling to gain the backing of her entire Christian Democratic Union, which embarrassed the chancellor this summer by refusing to back her candidate for president.
Even with her standing lessened and despite protests from Washington that her plan would slow the global recovery, Merkel has managed to introduce drastic spending cuts. Her plan, unveiled in June would be the largest spending decrease since World War II. It calls for some $100 billion in cuts by 2014 in social welfare programs like unemployment insurance and through reductions in parental allowances, as well as the elimination of some 10,000 federal jobs and 40,000 jobs in the German military.
The plan — which will make its way through German parliament in the fall — drew criticism not only from Washington, but from German labor unions and economists as well. They claimed cuts this large would slow recovery not only in Germany, but also across the European continent. But so far, the opposite is happening in Germany, which received unexpected good news about the health of its economy last week, when Germany’s central bank released revised growth estimates that predicted the German economy would grow by 3 percent this year.
Despite widespread protests from the German public and from politicians from across the political spectrum, Merkel and her coalition have remained steadfast in their resolve to cut spending. In an op-ed defending Merkel’s plan, German Finance Minister Wolfgang Schäuble said growth could not come at the price of increased debt.
“The German government knows it has a responsibility to promote growth in Europe and the world,” Schäuble wrote in the Financial Times. “We will rise to it not by piling up public debt but by fulfilling our traditional role as an anchor of stability.”
It remains to be seen whether these drastic spending cuts will have a positive effect. Despite Germany’s success, economic growth in the U.K. remains stagnant. The worldwide debate among economists — whether additional stimulus spending would jumpstart an economy, or whether spending reforms will attract global investors — is being tested in Europe right now. If both Germany and Britain succeed in growing GDP and creating jobs in spite of deep cuts, the pressure will be on the United States to follow suit.