So the results have rolled in, and it looks like it’s going to be an awkward one.
In France, Socialism has prevailed. Bye bye Sarkozy and his singing wife and the high society drama. Hello François and his civil-partner-that-he-won’t-marry and the anti-austerity rhetoric.
So what’s different?
Sarkozy was all about the Merkozy. He advocated austerity, and he planned to cut the deficit by cutting costs.
Hollande is all about the socialism. He advocates growth, and he plans to cut the deficit by raising taxes.
The Arguments in Favour of Austerity
- An individual cannot spend more than he earns. And by that, I mean that he cannot spend more in his lifetime than he can potentially pay back. So as a 26 year old – I could probably spend a fair amount more than I currently earn because my expected future earning potential should cover today’s shortfall.
- But once I pass that threshold, I have achieved full bankruptcy. And I’m not talking about a liquidity issue – where I don’t have enough money to pay back my installment today. We’re talking about indefinite bankruptcy, where I will never be able to pay back my debt.
- That point of no return is somewhere between “I have a shortfall this month” and “my debt installments are bigger than my entire salary”.
- In a country sense, this is where the projected growth in GDP is too low for the current debt levels to ever be sustainable (ie. the debt levels will increase even if the country spends nothing that month and pours its entire GDP into repaying the debt).
- In that scenario – the only real options are austerity (being a fundamental paradigm shift in national consciousness toward a more sustainable manner of economic existence) or forced taxation (through inflation perpetuated by changes in the money supply).
- Default is then just a timing issue: if a government is pre-emptive, it avoids default. If it is reactive, it defaults, and then you’re back to either austerity or inflation.
- Default, however, increases the likelihood of the inflation tax – because the market cost of debt will sky-rocket – and austerity may no longer be an option.
- Therefore, an honest estimation of realistic GDP is required. You look at population growth rates and natural resources to see if the fundamentals imply economic growth (generally, a decreasing population and limited natural resources imply a low possibility of growth). You also project future expenditure to see if current commitments already made can be covered by this future growth (generally, an aging population with pension and medical aid plans is about to become hugely expensive). If current debt levels are unsustainable (as they are in Greece), austerity is the best option.
- Because growth will never be enough.
- And what happens when you have sudden unbudgeted expenditure? There’s no breathing space.
The Arguments in Favour of Growth
- Semantics. There will always be enough economic growth to cover the debt levels. Besides, we think that we haven’t passed that threshold of no return – that’s all hypothetical.
- Also, you never know. A plague could take care of the issue. Or a war. Or the end of the world.
- And the voters want growth over austerity.
In the end, people are short-term gratifiers. We will take growth over austerity because we have an ingrained sense of entitlement. Life should be easy – and therefore, so it will be.