There are two types of austerity around in Europe today. The first is the type which cuts public sector wages, makes cash cuts in public spending, and forces rapid reductions in deficits. These rapid slimdown programmes are being imposed on the troubled countries of the Euro. Then there is the second type, the UK type, where current public spending overall continues to rise in cash terms, and even to rise a little in real terms, but is cut back from previous forecast levels. They are very different.
Both the UK and the Euro area countries have put up taxes to plug the deficits. Both are experiencing falls in real wages. The worst austerity in the UK is taking pace in the private sector, in the homes of individuals and families. Since the crisis first hit in 2007, UK real wages have on average fallen by 10%. The UK has suffered from higher inflation than many other countries, and private sector wage rises have slowed to almost nothing. Real wages have been badly mauled in Greece, Ireland and Portugal amongst others.
If the IMF and others are going to help find a way out of the current economic predicament in Europe they need first to be honest about which types of austerity different countries have experienced. They also need to grasp that a country without its own currency is in a very different position from one that still has its own currency. Maybe the Head of the IMF is becoming critical of deficit reduction strategies because she thinks a Euro country is the new norm.
An individual Euro country cannot devalue to price itself back into world markets. It cannot create new money to try to stimulate activity. This makes big fiscal adjustments that much more painful, as there is no reason to suppose the lost output created by the higher taxes and the lower spending will be supplanted by mroe private sector acivity.If it were a proper single currency, there would be much larger transfers of grant and loan money from the richer areas to the poorer areas, to make it all more tolerable.
In a country like the UK with its own currency and enthusiaism for looser money there is every chance of offsetting public cuts should these be made. It does, of course, also require mending the banks, so there is an easier mechanism to ensure some of the new money finds its way into productive private sector activities.