Crisis Lessons Trigger Post-Covid Austerity Warning From OECD

Governments should avoid an early return to austerity if they want to prevent a repeat of the political tension that followed the global financial crisis, according to a senior official at the OECD.

Ulrik Vestergaard Knudsen, deputy secretary-general of the Organisation for Economic Cooperation and Development and a candidate for the top job at the Paris-based group, says it’s important to learn from past crises, which made clear that an early end to state aid programs fanned income inequality, fueled division and spurred a populist backlash against globalization.

“Austerity is not the answer today, both because of the bad experiences from the last crisis and because today we are in a zero-interest rate environment,” the Danish economist said in a phone interview.

His comments, which echo a warning from the OECD last month, highlight an ongoing debate on the role that fiscal policy should play in shaping the recovery from a global pandemic that has caused some of the biggest economic contractions in modern history.

The mood in Europe appears to have changed from a decade ago, when German Chancellor Angela Merkel pushed through budget cuts and pressured fellow European governments to reduce their debt levels to preserve the integrity of the euro area.

After approving a recovery package worth 750 billion euros ($911 billion) to combat the fallout from the pandemic, the European Union last week proposed extending the deadline for companies to claim billions of euros in Covid-related state aid until the end of the year. And that’s despite massive public debt levels. In Denmark, where Knudsen is from, the Social-Democrat government has already ruled out austerity as a tool for economic recovery, calling it an “old-fashioned way of thinking.”

Back Globalization

Austerity has been blamed for the rise of isolationist policies in the West in recent years, with the election of Donald Trump as U.S. president a prime example.

Knudsen, 51, says it’s time to stop “rejecting international trade” and instead aim to better distribute its benefits. “And that does not happen automatically.”

He also points to growing interest in the Nordic region amid mounting evidence of a rise in income inequality, with the wealthy being able to make a better use of the free money flowing from central banks.

“The Nordic welfare model certainly has a lot to offer in terms of cohesion and inclusion,” he said.

Knudsen believes the OECD can also play a key role in prompting policies designed to contain global warming, for instance by helping market-based economies “develop solutions together.”

— With assistance by Lars Klemming

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