Economists are likely to debate the pros and cons of the austerity response to the eurozone debt crisis for years — if not decades — to come. But it is hard to argue that with eurozone countries having had several years of growth then loosening the governmental purse strings is not only fair on taxpayers who have endured dwindling pubic services but sensible from an economic standpoint.
Whether or not Italy's and Spain’s spending plans fall into the "sensible economically" bracket is again one for the economists, but from a capital markets point of view this fiscal loosening is a case of unbelievably lousy timing.
Eurozone rates have been in negative territory for the last few years. Spain, Italy et al could effectively have been paid for borrowing money. Just think of the boon if the countries had invested that cash sensibly in economy-boosting infrastructure, research or education. It may have been a once in a lifetime — once in history even — opportunity for a government to be paid for spending.
The currency bloc is not the sole defendant in the dock on this charge — stand up David Cameron’s Conservative government in the UK, which somehow convinced the populace that a recession caused by a global financial meltdown was actually due to overspending by the previous Labour government — but its failure is glaring.
What is the point in central banks driving monetary policy to the floor (then in some cases digging a hole and pushing it into the nether reaches) if governments do not then take advantage by borrowing cash to update infrastructure, improve their economies and everything else? Is that not what capital markets are for?
Sure, one could argue that borrowing costs also tumbled for the private sector — but all that happened there was share buy-backs and other efforts to fill executives’ pockets. There was little mention of spending on research and development.
That was the moment government should have stepped in with some big spending plans.
Of course, while fiscal expansion is late, it is not too late. But with quantitative easing coming to an end, it will come at a higher cost than it would have done over the last few years. There will also be fewer years to borrow before the inevitable turnaround comes.
The eurozone has had extraordinary monetary policy over the last few years. It’s just a shame that the fiscal policy was also extraordinary — but for the wrong reasons.
