Are we nearing the point where people in developed countries have decided they’re no longer prepared to stomach harsh austerity regimes for the sake of fiscal probity?
Recent developments in Iceland and Portugal seem to suggest that they could be. But the real tests will be whether US voters back the deep cuts to government health insurance and social security that form part of the Republican party’s plan to rein in US government deficits.
Icelandic voters, meanwhile, have firmly rejected the idea that they should be forced to pick up the tab for their bankers’ mistakes. In a referendum on Saturday, they rejected a deal to repay Britain and the Netherlands about €4 billion ($5.78 billion) lost during the global financial crisis.
“A large majority of Icelandic voters has thrown out the immoral notion that odious private debt can be nationalised as an afterthought,” said Frosti Sigurjónsson, one of the leading no-vote campaigners.
The losses arose when British and Dutch savers deposited their savings in an Icelandic internet bank called Icesave, which offered high rates of interest. But Icesave’s parent, Landsbanki, collapsed in October 2008 when it, along with Iceland’s other major banks, could no longer raise money in global capital markets. The UK and Dutch governments were forced to cover the losses suffered by their residents, but looked to Reykjavik for compensation.
Iceland’s government struck an agreement with the UK and Dutch governments last December to provide a sovereign guarantee for any shortfall in the amount recovered from Landsbanki. But in February, but Ólafur Ragnar Grímsson, the country’s president, vetoed a parliamentary bill that would have sealed the new deal, triggering the referendum. After Saturday’s vote, Britain and the Netherlands are threatening to take Iceland to court.
The European Union and the International Monetary Fund look set to force Portugal to agree to implement even tougher austerity measures than those that triggered the collapse of its government two weeks ago, as the price for a €80 billion ($114 billion) bailout.
To make sure that whoever wins the June 5 elections supports the bailout program, the EU and the IMF are negotiating the terms with Prime Minister José Sócrates’ caretaker government, and also with the major opposition parties.
But hopes of reaching a cross-party agreement on the austerity package dimmed on the weekend after Sócrates launched a scathing attack on the main opposition party, the Social Democrats, accusing them of having only “vague ideas and empty words”. Portugal, however, has little room to move. The country’s cash reserves are dwindling and it faces a major debt repayment in mid-June.
And in the United States, the battle over large cuts to government spending is set to escalate in coming weeks as Democrats and Republicans face the crucial vote on lifting the US government’s debt ceiling.
On Friday night, Republicans and Democrats reached a last-minute deal to cut government spending by $38 billion in the remaining six months of this fiscal year.
But Republicans are insisting that they want further large spending cuts in exchange for supporting an increase in the debt ceiling. Democrats are instead proposing to cut government spending with a “scalpel, not a machete”, and want to shift the focus of the debate onto proposed Republican tax cuts.
Last week, the Republicans laid out an ambitious plan for reducing government spending by $6 trillion over the next decade. This week, President Barack Obama is expected to respond, laying out his own long-term deficit reduction plan for reducing the country’s soaring debt.
There’s little doubt that the question of how to rein in the ballooning US budget deficit will dominate the US political landscape in the lead-up to the 2012 presidential election. And both sides will be keeping a close watch on how US voters respond to proposals to slash government spending — particularly in politically sensitive areas such as health insurance and social security.
*This article first appeared on Business Spectator