Economics, International economy, Monetary Policy, Pethokoukis

Has austerity been good for Europe?

Image Credit: Shutterstock

Image Credit: Shutterstock

An interesting counterfactual is how the eurozone economies would have performed if the ECB had implemented an aggressive communications and quantitative easing stategy. My guess: much, much better — just as easier money has helped offset US austerity. That is something to keep in mind as one read’s Daniel Gros’s defense of European austerity:

Economists like to point out that solvency has little to do with the ratio of public debt to today’s GDP, and much to do with debt relative to expected future tax revenues. A government’s solvency thus depends much more on long-term growth prospects than on the current debt/GDP ratio.

A reduction in the deficit today might lead in the short run to a fall in GDP that is larger than the cut in the deficit (if the so-called multiplier is larger than one), which would cause the debt/GDP ratio to rise. But almost all economic models imply that a cut in expenditures today should lead to higher GDP in the long run, because it allows for lower taxes (and thus reduces economic distortions).

Austerity should thus always be beneficial for solvency in the long run, even if the debt/GDP ratio deteriorates in the short run. For this reason, the current increase in debt/GDP ratios in southern Europe should not be interpreted as proof that austerity does not work.

Moreover, austerity has been accompanied by structural reforms, which should increase countries’ long-term growth potential, while pension reforms are set to reduce considerably the fiscal cost of aging populations. Such& reforms promise to strengthen the solvency of all governments that adopt them, including those on the eurozone’s periphery.

I would add that raising the eurozone tax burden further from already high levels is not automatically a long-run plus for growth. Too much of the region’s austerity was from tax hikes.

5 thoughts on “Has austerity been good for Europe?

  1. The problem with QE is that it distorts markets, perhaps creating a short term boom surely to be followed in the longer term by a bust as the induced malinvestments fail. Those who say austerity has failed ignore that it was lack of austerity in the first place that created the problems. If there is failure, it is in NOT reducing government largess even more. WHich countries do worse under austerity? THose who were the most profligate in the first place. WHich country was about the least spendthrft? Germany. Note German relative prosperity vis a vis Greece, Italy, Spain et al, note further that German taxpayers and thus the German economy were made worse off by transferring some of their wealth to the PIGS in order to keep them afloat. Rewarding the PIGS (Portugal, Italy, Greece, Spain) with bailouts will do little to alleviate long term problems, merely pospone the day of reckoning while making it possible for them to contiue to over-spend.

    But note that the banksters love the bailouts, as they earn interest off the money they create out of thin air to keep the house of cards, temporarily, from collapsing. Note further injections of US cash from our FED and FED supported banks, which puts downward pressure on the value of our dollar.
    JP the monetarist Keynesian pseudo- economist.

    Oh what a tangled web we weave when first we practice to deceive.

  2. It seems the article is effectively arguing that private debt-driven economic growth is better/more sustainable than deficit-driven. But this is not correct anywhere, especially not in the US.

  3. Austerity isn’t the issue.

    There isn’t any Euro austerity, and even if there were, it doesn’t address the underlying problem: catastrophic fiscal failure of EMU member countries, subjugated and now enslaved in medieval monetary policy fealty to the ECB, and Germany.

    When monetary union members signed on, they explicitly agreed to surrender any monetary policy decisions to the ECB, and by proxy, Frankfurt (the Bundesbank, the strongest member of the EMU). In so doing, they signed their own death sentence.

    Only the ECB has the power to print money, so when Greece, Italy, Spain, Portugal, etc. etc. overran their statutory fiscal budgetary constraints, the only viable short-term solution was to print.

    Guess what those countries could no longer do, thanks to their EMU membership?

    Either Germany will leave the EMU and EU, or the PIIGS will, in unknown combinations. Take your pick, one of those things will happen, guaranteed.

  4. What austerity in Europe. They all claimed austerity, but if you look all the budgets went up faster than inflation. It was austerity in name only.

    And in the US, easy money – how is it helping other than causing inflation in the stock market and housing? If we had not stolen money from the private sector for all these stimuluses we would have been out of this gloom 3 years ago.

  5. As usual the crowd is misled.

    The Euro, as a (collective, unified) currency, does not exist. Per the Treaty, each sovereign nation CONTINUES to issue its own fiat currency.
    The old central banks are still in action — and still keeping track of who owes whom — across the borders, too.
    The original, original Euro was a trade terms device originated in Paris for the steel, iron and coal trade with West Germany in the early 70′s — after Nixon took the USD off of even the figment of the gold standard.
    That two-party treaty (France and Germany) was designed so that the insane impact of OPEC on the trading value of the USD would stop screwing up long term contracts across the border. Since neither party could trust the other to not game their own fiat currency; a trade weighted basket was devised. In this way, the treaty allowed them to un-Dollarize their trade — and settle accounts in ‘Euros.’
    Step-wise other European powers adopted the scheme. But for twenty-years, it was only ever a bookkeeping ‘currency’ / trade settling mechanism.
    By the late 90s Paris became so enthused that it was decided that Euro scrip should be issued for retail trade: Euros.
    At first Berlin wanted to label each nation’s currency as:
    German Euros
    French Euros
    Belgian Euros
    etc. right on the face of the script.
    Paris nixed that. She wanted the legend to read “Euro” and that’s that. She got her way by letting Berlin having the ECB — a supra-national bank — quartered in Berlin.

    Most important: the issuing powers are STILL issuing UNIQUELY identifiable currencies. The banknotes are spotted by their suffix. ( X = Germany, Y = Greece, etc.) The various central banks STILL keep track of domestic deposits and crossborder trade.

    The coins are also unique. Each nation has one-side of their coins to display national icons.

    The Treaty specifies that not one of the nations inside the Euro trading zone is liable for the currencies of the others!

    So, what the Euro REALLY is, is a rigid exchange rate system so beloved of mercantilists over the centuries. Sometimes called a ‘peg,’ such schemes ALWAYS break down — and in the same way.

    By tradition, rigid exchange rates are associated with silver and gold standards; but you can get rigid without them.

    At the end of the road, the creditor nations discover that they’ve suffered MACRO-EMBEZZLEMENT. Their assets ( IOUs/ markers/ bonds ) plunge in value — typically bankrupting their bankers.

    The debtor nations, de facto, are bankrupted in the paper markets — while hanging on to all the physical assets that they bought on tick.

    Such a dynamic entirely explains why Berlin does not want to recognize the on-going embezzlements; why the bad paper is being rolled over.

    Tied into the banks, in a major way, are the exporters of the creditor nations. Without the Euro con, Germany’s export engine would collapse. She’s not actually selling for good money. The peg is allowing exporters to collect from the banking system on sales that should never have been booked.

    Once Germany, et, al. shut off the bleeding, her unemployment rate will explode north.

    In the meantime, the youth in the debtor nations can’t get any employment. More than they realize, they’re being forced to compete with German robots, REAL robots. The ones that high labor cost Germany employs to stay hyper-competitive with Japan, Red China, and America.

    Against those powers, the PIIGS are a joke.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>