Liam Dann 's Opinion

Business editor of the NZ Herald

Liam Dann: Europe's woes a warning for Key and co

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Three events in Europe this week have highlighted the difficulty Western nations are going to have dealing with sovereign debt.

The Dutch Government resigned after it failed to pass a raft of austerity measures.

Right wing French leader Nicolas Sarkozy lost the first round of the French presidential elections to a socialist .

And, in the UK, David Cameron's Tory-led Government has been under attack after fresh figures show the UK economy is back in recession.

There are ominous warning signs in all of this for Finance Minister Bill English and Prime Minister John Key as they continue to stake their political future on balancing the Government books by 2014-2015.

The rebellion of the Northern European public is problematic for the European Union and a major challenge to German Chancellor Angela Merkel's prescription for the debt crisis.

When Greeks riot in the streets it has little impact on markets. The country is so deep in debt not even their Socialist leaders have any scope to say no to austerity measures. But the likes of the Dutch, French and Brits are not so far gone that the debate is dead. They are culturally more conservative anyway and have thus far been supporters of Merkel's approach.

If the public in the north gets cold feet then financial markets are going to be spooked. The Dutch yesterday reached a deal to deliver the budget cuts Brussels requires and it remains to be seen whether Sarkozy will lose the head-to-head Presidential run off with his socialist rival.

But there are signs that the hardline policies are wearing thin four years on from the height of the financial crisis.

A fundamental problem appears to be the incompatibility of austerity and democracy. Unless you've discovered some incredible new revenue stream, getting out of debt tends to require restraints on spending.

It's a bitter pill. But telling the public to shut-up and swallow is not much of a political strategy. It might work for a while in a time of crisis but as this economic downturn drags on through the political cycle the public is increasingly at risk of exercising their democratic right to be fickle and self-interested.

Someone somewhere can always make a good case for why their particular corner of the state-funded world should be left alone.

In Britain, critics on the left have been quick to say "I told you so" and draw the correlation between the Tories fiscally conservative policies and the double dip.

The fact that attacking debt slows economic growth doesn't prove the austerity policy is wrong. It just proves it has short-term consequences - so does most major surgery.

The grand debate - whether austerity or stimulus is better way to negotiate a downturn - will only be resolved by the historians.

What the European experience is proving is that even if politicians have it right they run the risk of being thrown out before the job is done properly. In fact, even if they get far enough along to rebalance these seriously out of kilter economies they may be dumped unceremoniously for their efforts, paving the way for freer-spending rivals on the left to come in and reap the rewards.

That would seem to be the big risk for the National Government right now. Based on the year they have have had so far and their current resilience in the polls, it seems unlikely to be a single controversial issue that will turn voters against them. It will be, as it almost always is, the economy

How long will the public let Bill English keep telling them he is dealing with a crisis? His quest to rebalance the economy and restore the country to sustainable productive economic growth is admirable but in the face of persistent global headwinds it is looking far longer and more painful than anticipated.

Dairy prices are falling, the dollar is still too high and our major trading partner across the Tasman is cutting interest rates as growth slows. Yesterday English reiterated his commitment to curbing Government expenditure.

How many zero budgets can he deliver before the polls flag? If the economy continues to flatline for the rest of the political term then that commitment is going to be seriously tested.

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- NZ Herald

Liam Dann

Business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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