Wednesday, August 14, 2013
Has Austerity Failed in Europe?
August 14, 2013
Although many European governments have announced expenditure cuts and tax hikes, their debt/GDP ratios continue to deteriorate. So, if the purpose of austerity was to reduce debt levels, its critics are right: fiscal belt-tightening has failed. But the goal of austerity was not just to stabilize debt ratios.
In fact, austerity has worked as advertised in some cases. Germany’s fiscal deficit temporarily increased by about 2.5 percentage points of GDP during the global recession of 2009; subsequent rapid deficit reduction had no significant negative impact on growth. So it is possible to reduce deficits and keep the debt/GDP ratio in check – provided that the economy does not start out with large imbalances, and that the financial system is working properly. Obviously, the countries on the eurozone’s periphery do not meet these conditions.
Countries whose governments have either lost access to normal market financing (like Greece, Ireland, and Portugal), or face very high risk premia (like Italy and Spain in 2011-2012) simply do not have a choice: they must reduce their expenditures or get financing from some official body like the International Monetary Fund or the European Stability Mechanism (ESM). But foreign official financing will always be subject to lenders’ conditions – and lenders see no reason to finance ongoing spending at levels that previously led a country into trouble.
Posted by Yulie Foka-Kavalieraki at 7:10 PM