Austerity is not enough

The Euro crisis is terrifying, as Peter Oborne rightly says in today’s Telegraph. But what scares me even more is the paucity of the debate. Right now, the summitry is aimed at saving the euro as if this were an end in itself. Merkel’s logic (‘if the euro fails than Europe fails’) is dangerously simplistic: there are millions out of work, including half of young people in Spain, and they won’t be helped if their dole money is paid in euros. Recovery is needed. Jobs are needed. The euro has always been a project that puts politics first and economics second, with disastrous consequences. It cannot now be solved by political willpower or political cliches. The bailouts are mounting, and failing. We keep playing double or quits: a hundred billion here, a hundred billion there. Sooner or later, it adds up to real money.

But even more concerning is the talk about austerity. Sure, broke governments have to cut spending, but this won’t get them out of this hole. The technocrats won’t fix this by being parachuted in to cut. A smaller version of the Italian state will not overcome the problem that the Italian economy has not really grown for the last decade. Austerity is not enough. Real reform is needed, and this means people asking questions like: what can we do to encourage producers? How do we get the economy moving? The old answer – governments borrowing then spending money – is what got us into this debt crisis in the first place. But there is almost no discussion about what will get us out. We have the crisis, but not the solution. As Walter Scott once put it: The hour has come, but not the man.

Last week, I met Steve Forbes and interviewed him for the current issue of the Spectator (subscribers here). He calls for a flat tax of 20 per cent, which he says will kick start growth. Here’s an extract:

‘As he knows, the idea of a tax revolution sounds mad — especially in the British political debate, where the argument at present is over whether state spending should be 1 per cent higher or lower. But this is his point: that British politics has become so deeply stuck in an intellectual rut that any new thinking sounds bonkers. What’s really mad, he says, is the current policy of relying on deficits (George Osborne now plans to increase debt by more than Labour proposed before the election) while embarking on a massive programme of quantitative easing, or printing money. The side effect of these freshly minted bank notes is to devalue the pound, but in a way the Bank of England believes it can control. Forbes is not so sure. ‘It just is the 1950s and 1960s on steroids,’ he says. ‘Printing money is not the way to wealth. You need an environment that’s hospitable to enterprise. You don’t create that environment by trashing your own currency.’ Yet this, he says, is the only idea the government seems to offer. ‘Talk to small businesses and ask them how the Labour years treated them, in terms of regulation. Have the Tories made much difference? Not really. Look at what they’ve done to taxation, look at what they’ve done to the pound itself. Very nice if you’ve already made money. But if you want to make money now, you find yourself in a very, very harsh environment.’

Now, you may think that Forbes’ flat tax proposal is for the birds. But who has a decent alternative? Is the status quo really working out for us? We have a serious problem, and the stakes are horrifyingly high. Yet we have a dearth of radical solutions – in Europe, anyway. The American political debate is quite different, with the Republican candidates competing with each other radical reform ideas for their economy. We’re just not having that debate here: on the right, or on the left. Osborne promised us a growth review in last week’s budget. There wasn’t one, and no one even noticed.

As another American politician might have put it, the size of Europe’s problems has outgrown the smallness of our politics. We need to think big, think radically – and think growth. Until these summits start discussing growth, then Europe won’t even come close to climbing out of the hole into which it’s sinking.

Non-subscribers can read the rest of the Steve Forbes interview by subscribing to the Spectator from just £1 an issue.