Austerity commands an increasingly prominent role among governments struggling to abide by the terms of rescue packages, as well as those under pressure to arrest spiralling deficits and debt-to-GDP ratios.
And while earlier, near-punitive bail-out conditionality terms applied to cases like Ireland are now less severe, the political reverberations are visible across Europe, from French labour demonstrations to Greek and Spanish riots.
Even the IMF, in its recent World Economic Outlook, acknowledged its own overestimation of fiscal multiplier effects and the broader constraints of austerity in current economic conditions.
In the economic boom leading up to 2008, investment in sustainable areas, such as renewable energy, is commonly viewed as a logical eventuality. Many of these areas, however, are proving vulnerable to economic shocks.
In August, for instance, the UN called on the US to suspend its US corn-based ethanol mandate that has amplified grain price inflation through this year’s drought. Europe, in contrast, has reinforced ambitious policy goals at the national and EU levels through environmental norms.
These policies have laid out a low-carbon economy by 2020 through the establishment of carbon markets, emissions reductions targets, energy efficiency objectives and greater renewable power generation.
However, these sustainable plans now bear some responsibility for producing their own economic rigidities that compromise national efforts to restore fiscal balance and competitiveness.
Labour, healthcare and pension costs have traditionally represented economic rigidities, and the counterweights of an unfortunate trade-off in the calculus of austerity.
Europe bears widespread evidence of this, most recently in the protest refrain by the Spanish Worker’s Syndicate of Andalusia: “No! No! We do not want to pay off debt with healthcare and education.”
The face-off between austerity’s sober pragmatism and sustainability’s Panglossian outlook has produced an ironic reversal. Choices in some ‘sustainable’ investments are producing unintended consequences now proving unsustainable in the context of weaker economic growth.
By itself, austerity represents a superficially straightforward exercise where costs – typified by IMF adjustment prescriptions like privatisation, liberalisation, tax reform and a recalibration of entitlements – fall back in line with prices.