Yes, there’s been austerity in Europe

The latest salvo in the debate over austerity in Europe is to… imply there hasn’t been much austerity at all. At National Review, Veronique de Rugy posts a chart suggesting that if you don’t adjust for inflation and don’t count tax increases, there’s only been a bit of budget-cutting.

Why so unpopular? (Michael Probst — Associated Press)
But this seems to misunderstand what austerity is. It’s not all about spending cuts. So let’s back up for a second. The standard Keynesian prescription for countries that are stuck in a deep economic slump — and this seems to describe much of Europe — is to actively increase deficits through more spending or tax cuts.

Instead, most countries in the euro zone have done the opposite. They’ve been cutting spending and hiking taxes while the economy’s still weak. This is austerity. The typical criticism is that pursuing austerity during a downturn hurts economic growth — and, as such, makes it even harder to get debt burdens under control.

And austerity really is happening in Europe. The best way to see this is to look at the change in the “structural budget deficit” for each euro zone country — that’s the amount of deficit countries have once you factor out economic conditions. In other words, this is the part of the deficit that governments have direct control over. And, according to data from the IMF’s World Economic Outlook (see table B-7), most euro zone countries have been sharply cutting their structural deficits since 2009.

There’s been a lot of austerity. And there’s a lot more austerity planned. Here’s a chart we made showing this:

Some countries have carried out a huge amount of austerity since 2009, trimming spending, hiking taxes, and shrinking their structural deficits considerably: Greece, Portugal, Ireland, and Spain are the leaders in this regard. Others have engaged in just a tiny bit of austerity, like Germany and the Netherlands. And Finland stands out as an outlier, having actually engaged in a bit of fiscal stimulus between 2009 and 2011.

Now, one question to ask is whether austerity is actually hurting economic growth in Europe. There are some signs that it is. The Financial Times’ Martin Wolf created the chart below — using similar IMF data — showing that there’s a very sharp correlation between the amount of belt-tightening carried out between 2008 and 2012 and the amount of economic growth each country enjoys:

There are a few countries that (slightly) buck the trend. Both Germany and France carried out small amounts of austerity, and they still managed to grow a tiny bit. Likewise, Netherlands and Finland engaged in a bit of stimulus, but their economies still contracted a little bit. On the whole, though, the relationship holds: More austerity was correlated with weaker economic growth.

And if that’s the case, it’s a problem. Because if a country’s economy is shrinking, then its debt troubles are likely to grow. (It’s tough to rein in your debt-to-GDP ratio when GDP is falling faster than your debts.)

And Wolf has another graph here showing that very few euro zone countries have actually managed to reduce their overall deficits in the past three years by engaging in austerity. The effects of weaker growth are swamping the savings from budget-cutting. The only real exceptions are Greece — which has engaged in so much belt-tightening that its actual deficits have fallen — and Italy, which has seen a very modest improvement over the past two years. The rest of Europe seems to be in even worse budget shape than before, despite carrying out austerity measures.

So that’s the basic shape of what’s going on. Countries in the euro zone have been pushing forward with austerity, through a combination of spending cuts and tax increases. Even those countries that could potentially afford to engage in more stimulus, like Germany, are instead putting on the brakes. And, as Wolf argues, there’s a case to be made that austerity is causing a lot of economic pain without actually solving Europe’s debt woes. That might be one reason why it’s so unpopular.

(The Economist’s Ryan Avent has more charts and commentary on this topic.)
Update: Veronique de Rugy replies to say she never denied that Europe was engaged in austerity. Her point was that European-style austerity has involved spending cuts and large tax hikes. Fair enough. On that we’re in agreement, and apologies if I misread her. (Whether austerity might have worked better if it had been more heavily tilted toward spending cuts, as she suggests, is a separate and more complicated question.)


About James Crist

How do we stop America's decline? The country is in trouble and we can all feel it. Where did we go wrong? How do we fix it? We now have an auction-based government, for sale to the highest bidder. Politicians have become nothing more than corporate whores and pawns for the rich. If we want our representatives to represent us, let them get their campaign money from us, their constituents. We have to amend the constitution to get the big money out of politics.
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