The Spectre Haunting Europe: Debt Defaults, Austerity, and Death of the “Social Europe” Model

Wednesday, January 19, 2011
By Paul Martin

by Prof Michael Hudson and Prof. Jeffrey Sommers
Global Research
January 18, 2011

spectre is haunting Europe: the illusion that Latvia’s financial and fiscal austerity is a model for other countries to emulate. Bankers and the financial press are asking governments from Greece to Ireland and now Spain as well: “Why can’t you be like Latvia and sacrifice your economy to pay the debts that you ran up during the financial bubble?” The answer is, they can’t – without an economic, demographic and political collapse that will only make matters worse.

Only a year ago it was recognized that decades of neoliberalism had crashed the U.S. and several European economies. Years of deregulation, speculation and lack of investment in the real economy had left them with rising inequality and little consumer demand, except for what was financed by running up debt. But the financial press and neoliberal policymakers counterattacked, using the “Baltic Tigers” as an exemplary battering ram to counter Keynesian spending policies and the Social Europe model envisioned by Jacques Delors.

Analysts have viewed Latvia’s October election results as vindication of the efficacy of austerity for solving the economic crisis. The standard narrative is that Latvia’s Prime Minister won re-election even after imposing the harshest tax and austerity policies ever imposed during peacetime, because voters realized that this was necessary. On politics, the standard narrative (as recently rolled out in The Economist) is that Latvia’s taciturn and honest prime minister, Valdis Dombrovskis, won re-election in October even after imposing the harshest tax and austerity policies ever adopted during peacetime, because the “mature” electorate realized this was necessary, “defying conventional wisdom” by voting in an austerity government.

The Wall Street Journal has published several articles promoting this view. Most recently, Charles Doxbury advocated Latvia’s internal devaluation and austerity strategy as the model for Europe’s crisis nations to follow. The view commonly argued is that Latvia’s economic freefall (the deepest of any nation from the 2008 crisis) has finally stopped and that recovery (albeit very fragile and modest) is under way.

This view appeals to bankers looking to prevent defaults on private and public debt, hoping that austerity can lead to economic recovery. But Latvia’s model is not replicable. Latvia has no labor movement to speak of, and little tradition of activism based on anything other than ethnicity. Contrary to most press coverage, its austerity policies are not popular. The election turned on ethnic issues, not a referendum on economic policy. Ethnic Latvians (the majority) voted for the ethnic Latvian parties (mostly neoliberal), while the sizeable 30% minority of Russian speakers voted with similar discipline for their party (loosely Keynesian).

Twenty years from independence, the consequences of Russian emigration to Latvia under Soviet occupation still shape voting patterns. Unless other economies can draw upon similar ethnic division as a distractive cover, political leaders pursuing Latvian-style austerity policies are doomed to electoral defeat.

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