A Conservative Faustian Bargain: Why One Conservative Finance Minister’s Decision to Run for Mayor Matters for Conservatives across Europe
During the worst economic meltdown since the Great Depression, one would reasonably expect a finance minister to have a fairly busy schedule, administering a country’s financial emergency strategy. Not so Austrian finance minister, Gernot Blümel, whom you can see merrily distributing election gifts to passers-by in Vienna’s highstreets instead. While finance ministers around the world struggle with the unprecedented economic challenge posed by the COVID-19 pandemic and its ancillary social and economic outfall, Mr. Blümel bids for the Viennese mayoralty.
It is no easy feat to determine why this matters beyond Vienna’s city walls. But the seemingly negligible act on a global, even continental scale, offers a glimpse into the future financial situation and economic policy of many European nations. So, why would the finance minister who is widely praised for his handling of the coronavirus pandemic forsake his position in government to rule a city, and concede an impending defeat on the way? Mr. Blümel’s Conservative People’s Party does not stand a chance in the city’s elections. His Conservatives are trailing the Social Democratic Party who have ruled Vienna since World War II by more than 20 points.
To understand Mr Blümel’s quixotic undertaking, one must put oneself into the shoes of all finance ministers across Europe. The emergency measures imposed to cushion the worst economic impacts of COVID-19 have led to a surge in national public debt. Most countries’ gross domestic products have plummeted and full recovery is nowhere nigh. The Austrian economy will, for the first time in two years, run a budget deficit, breaking the key electoral promise that propelled the fiscally conservative government into power. European governments have also promised to extend generous furlough schemes and pay employees’ salaries on behalf of their employers well beyond the end of this year.
This accumulated public debt must be dealt with at one point. Finance ministers must at least offer some confidence that they might eventually deal with it. There are four ways to do this: 1) to default on the debt; 2) to establish austerity measures that mean reversing the necessary spending already promised under the various recovery programs; 3) to enact sharp rises in taxation, which may have the same effect as austerity on those who bear the brunt of the hike; and 4) a wait-and-see approach, where the government hopes that a growing economy in the post-pandemic world inverts debt-to-GDP ratios and that slowly resuscitated inflation eats away at the debt.
Obviously, the first option is a non-starter for most European countries. A default is both unwarranted in light of many countries’ debt sustainability and the reputational damage it would entail. Finance ministers ought to avoid the second option, as removing urgently needed government support for the economy and the vulnerable in society at a time of a global health crisis and recession would be tantamount to political suicide. According to most economists, option 3 of broad-based tax increases chips away at the debt. However, doing so would hit those who are already the worst off due to the pandemic. Other taxes, such as corporate, wealth or inheritance taxes, championed by the left, are insufficient in their scope and anathema to the political right to boot.
Finally, finance ministers can choose alternative four, the wait-and-see option. Doing nothing is always an option and, according to most economists, it is the best one at the moment. There is little point in thinking about public financial sustainability before the virus is fully under control and the economy is in stable condition. Until then, finance ministers, who have been riding a wave of popularity by legislating generous recovery schemes, have to bite the bullet and accept that a larger state that adequately caters for the needs of a receding economy and prostrate society is a necessary, even imperative condition, to survive this crisis. It is clear that in the foreseeable future there will be demand for more resilient and expensive public services. This combination will ultimately require discombobulating policy reforms, tax increases (option three) to ensure sustainable public finances, and rolling-back government expenditures (some aspects of option two) to return to stable burdens of debt and interest servicing costs.
But now is not the time, an admission that finance ministers on the left, such as those in Germany, Portugal and Spain, will have no problem in making. Finance ministers on the right, like those in the exchequers of Austria, the United Kingdom and the Netherlands, on the other hand, must diplomatically sidestep their political strategy built on low taxes and a small state. To avert losing face and conceding to the policies of the traditional left, inflating the welfare state and enhancing the state’s influence in the economy, they can twiddle with the tax system so as to appear industriously filling the budget deficit, thereby threatening to alienate their core supporters. This is the option chosen by the UK’s chancellor Rishi Sunak, for example.
Or, they can distract the electorate. What better way to achieve this than to run for mayor, where bombastic speeches displace talk of discomfiting budget deficits and rising public debt. Handing out gifts in the streets might divert voters’ minds from the Faustian bargain their minister has struck. Mr. Blümel’s tactic of distraction, precociously concealing his ideological balancing act, has a natural expiration date. After the Viennese go to the polls in early October, staggering public debt, unprecedented levels of government spending and a yawning budget deficit await. His is but the story of the canary in the coal mine. The pandemic and its economic fallout will stay with us for longer—a situation that conservatives across Europe must come to terms with. They, too, will have to strike a bargain between their ideology and its compatibility with reality.
