Over the weekend, the Hungarian government abruptly halted further fiscal austerity measures, due political pressure and upcoming October elections.
We said yesterday how this set a scary precedent for the rest of Europe:
It shows how austerity doesn’t count until governments actually push it through for a sustained period of time. It’s difficult for governments to even announce austerity measures in Europe, yet even more so to actually implement them.
We’re not alone in this belief either:
“Austerity is extremely hard to sell to electorates. The risk is that this moves from a wider financial and economic crisis to a European political crisis as governments are punished by voters. The approval rating for Lithuanian’s prime minister has fallen to 7pc.”
Greece is at an early stage of this political sequel. It has won praise from the IMF so far but spending cuts have only just started over recent months, and will grind much deeper over the next three years. Two MPs from the ruling Pasok party have been expelled for refusing to toe the line, and some Greek analysts say the party may ultimately splinter.
“The issue is whether they can carry the Greek people when have to make the next round of cuts in 2011,” said Chris Pryce, of Fitch Ratings.
Hungary’s latest debacle this argues why extreme austerity measures will ultimately fail for any continental European nation. Pushing through spending cuts isn’t a one-shot deal. It’s a protracted, painful process for an electorate to bear.
Thus the most successful debt-ridden nations won’t be the most radical budget slashers, who will quickly see their plans reversed or be voted out of office, but those who are savvy enough to sugar-coat their austerity measures. They’ll have to make austerity measures less aggressive than optimal; just enough so that spending is forced to retrench, yet voters don’t refuse their medicine.