A May Day demonstration in central Madrid. (Susana Vera / Courtesy Reuters)
Since the onset of the European sovereign debt crisis in 2010, countries across the continent have responded by imposing fiscal austerity. From Greece to Ireland, governments have cut spending by double digits. Spain, which is in the midst of a recession and has an unemployment rate nearing 25 percent, slashed its budget by eight percent and plans to shrink its deficit by an additional 27 billion euros this year. Even Germany, whose economy is considered the healthiest in Europe, has pledged to eliminate 80 billion euros in spending by 2014. These national austerity policies will be reinforced across the continent by the EU fiscal compact, a treaty slated to go into effect next year that will require European countries to maintain balanced budgets. Tea Party loyalists in the United States should be green with envy.
It is unclear if these efforts will quell market contagion or stabilize European economies in the short term. What is clear is that austerity will transform Europe’s political economy in the long term, lending credence to neoliberal ideas of limited government and loosely regulated markets. The irony of this transformation is that it reinvigorates the very ideas that helped cause the financial crisis in the first place; after all, it was the unyielding faith in markets and weak regulation that allowed the financial bubble to swell. At the same time, a response to the sovereign debt crisis based on austerity precludes any alternative social-democratic framework that would emphasize growth and protect citizens from the vagaries of the market.
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In the mid-2000s, during the heyday of the financial boom, the benefits of light-touch regulation and market-based solutions seemed indisputable. Self-regulation by firms, the argument went, would reduce the burden of slow moving, bureaucratic