Austerity is in, stimulus is out--and the amount of sacrifice by working people has to go up.

That was the message of finance ministers at the recent Group of 20 meeting in South Korea. In their joint statement, these economic policymakers said that rising government debt worldwide--highlighted by the debt crisis that is rocking Greece--compelled them to abandon the huge stimulus measures of late 2008 and 2009 in favor of deep budget cuts.

"Those countries with serious fiscal challenges need to accelerate the pace of consolidation," the finance ministers stated. "We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions."

Translation: Governments are bowing to the big international banks--yes, the same banks that survived the financial crash only as the result of government bailouts. Now, bankers and other bondholders want repayment of debts to be the highest priority of governments--ahead of schools, hospitals, the pay and pensions of public employees, and everything else.

Ireland has become a role model for this strategy as the government has already poured more than €30 billion into the banks, cuts wages of public sector workers by more than 15 percent and watched passively as unemployment grew.

The country at the heart of resistance to the new austerity is Greece . A general strike on May 5 was the largest yet in a series of strikes and protests. The struggle has spread to Spain, where public-sector workers mounted their own nationwide strike June 8 against cutbacks [2] that include a 5 percent pay cut for public-sector workers, a freeze on pensions and reductions in public spending.

Unions are also preparing to fight austerity measures in a range of other countries, including Germany [3], where the government recently announced record cuts of $96 billion, targeted mainly at welfare spending. "Germany, as the biggest (European) economy, has the outstanding task of setting a good example," Chancellor Angela Merkel said.

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TO BUY time to carry out this program, the most powerful EU countries--Germany, France and Britain, along with the IMF--agreed to fund a €750 billion plan to aid debt-wracked EU countries.

But this aid programme is designed to stabilise a banking system that is terrified of a sovereign debt default. European banks have an estimated €1,500 billion outstanding in debt and these debts are mainly held by French and German banks

The European rescue is based on a vast transfer of taxpayer dollars from the working class to the banks. For their part, the bankers will get relief by selling government bonds on their books to the European Central Bank (ECB). That's a U-turn for the ECB, which has until now refused to buy government bonds or otherwise rescue economically troubled countries.

This huge rescue might forestall a repeat of the financial panic of late 2008, when the collapse of the investment bank Lehman Brothers threatened to topple major financial institutions worldwide.

But even the best outcome of the EU strategy would involve a long and deep recession in Greece, Spain, Ireland and possibly other highly indebted European countries.

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CAN THIS harsh medicine eventually lead to a recovery? The power players in the EU hope that a deep cut in working-class living standards in those countries will not only free up money to repay government debt, but also lower labor costs so much that capital will invest once again and spark economic growth.

In 1929, the US president argued that market forces would spontaneously emerge to revive the economy once prices and wages went low enough. Instead, the downward spiral set off by the 1929 stock market crash continued, dragging wider sections of the economy downward for years.

It was amid this catastrophe that the ideas of economist John Maynard Keynes emerged as an alternative. Keynes contended that government spending--economic stimulus, in today's terms--was at times necessary to prop up demand in a complex industrial economy. That doctrine became the conventional wisdom during the long boom that followed the Second World War.

Over the last three decades, however, free-market economists have claimed that Keynes was wrong or irrelevant. The economic recovery of the 1990s, they argued, took place because government deregulated finance and other parts of the economy.

But with the crash of 2008, even the champions of deregulation went running to governments to prevent the collapse of the financial system. By investing, lending or guaranteeing trillions of dollars to bail out the banks, governments effectively assumed the banks' debts--with taxpayer money.

Now, however, governments have concluded that they can no longer afford Keynesian solutions. That's because bankers and bondholders, worried about governments' ability to repay their debts, have jacked up interest rates to punishing levels.

As a result, governments across Europe have for the past few weeks raced one another to announce austerity programs. Goodbye Keynesianism--hello 19th century free-market economics.

Economist and New York Times columnist Paul Krugman summed up the turn to austerity this way

So wise policy, as defined by the G20 and like-minded others, consists of destroying economic recovery in order to satisfy hypothetical irrational demands from the markets---demands that economies suffer pointless pain to show their determination, demands that markets aren't actually making, but which serious people, in their wisdom, believe that the markets will make one of these days.

The system is out of control and cannot even take advice of one of its more foresighted defenders, John Maynard Keynes, to get out of its woes.

We have returned to the dark days market mysticism. Instead of governments deciding policies, we are constantly told about how ‘the markets’ feel and think.

No surer sign that capitalism is past its sell by date and needs to be put out of its misery.