Keynesianism has been banished once more

After an initial dusting down and new found demand, Keynesian theory became the policy of choice for many states after the global recession of two years ago. Traditional Keynesians rejoiced but their celebrations were short-lived when faced with the new fashionable term, ‘fiscal austerity’.

In the UK, the then Chancellor of the Exchequer, Alistair Darling, announced a ‘reprioritisation’ spending policy which included Trident, housing, energy, Olympic Games and infrastructure projects.

A similar story was playing out in the US whereby a $700bn bailout was being implemented, even though this was after the UK had made its move. Even frugal Germany, albeit more reluctantly, approved a $121bn spending plan to foster economic growth.

All-in-all $2 trillion in economic stimulus packages was pledged by governments across the globe.

The well-documented fiscal problems (not to mention the blatant massaging of figures) in Greece has further raised the anxiety of the already nervous financial markets. Suddenly, the level of debt became the issue and investors were pulling their money out of even remotely risky projects. As they are part of the common currency this was not just a problem for Greece – Spain, Ireland and Portugal have all been placed on high alert.

Fiscal prudence was the only way forward to bow down to the financial markets and reassure them that it was still worthy of investment.

Perhaps this is perceived to be an excellent opportunity to make those difficult fiscal decisions and is one which Germany, France and the UK have followed suit. France announced $55bn of cuts in order to adhere to the often missed and therefore imaginary ‘Growth and Stability Pact’ target of a public deficit level of 3 percent GDP by 2013; this is to complement the extra tax revenues gained.

In a sign of “strength”, Germany had announced government cuts of $96bn including a series of cuts to the country’s social security system, in particular the welfare benefits for the long-term unemployed. The UK announced an initial £6bn of cuts and has recently announced slashing government departments by 25% over four years in a ‘tough’ budget.

Only time will tell whether easing the fears of investors and the financial markets will be a gamble worth taking. Jobs will be lost; household financial pressure will be felt. Is it possible for the private sector to pick up all of the remaining slack?

The world does still have China which is flying the flag government spending, and given that it has the world currency, the US does not have to feel the pressure of cut-backs. Nevertheless, could this be the end of Keynesianism?

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