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Is European Austerity for Real?

The austerity wave that swept Europe last year is under attack from all sides. François Hollande upset Sarkozy in the French election largely by running against austerity measures, and other European leaders are also calling for some relaxation. Much to the chagrin of the Germans, many economists (as well as The Economist), seem to believe the anti-austerity camp is right—that harsh austerity measures are crippling growth at the time that Europe needs it most.

But how austere are these austerity measures in reality? A chart from Veronique De Rugy (h/t Tyler Cowen) puts things in perspective:

Here the “austerity measures” supposedly sweeping Southern Europe look considerably less formidable. Italy and Spain are indeed beginning to see small reductions in spending, but even so, government spending remains considerably higher than it had been earlier in the decade. Even in the UK, widely lauded for its ambitious austerity program, spending is essentially flat. There may be something to the argument that sudden contractions without serious long-term reforms could stall the recovery. Nonetheless, the idea that Europe is suffering from plunging government spending simply isn’t backed up by the evidence.

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  • JMock

    But that’s not what Paul Krugman says! He has a nobel prize after all…

  • Cunctator

    Interesting piece, but shouldn’t the analysis be government spending as a percentage of GDP? The aggregate level of spending doesn’t reveal much otherwise. Perhaps I have misunderstood the graph and Dr. De Rugy’s analysis.

  • thibaud

    Red herring. The level of government spending is far less important than the degree and nature of government reforms of the financial sector and the many financial imbalances that were created by

    a) the eurozone’s mismatched economies and
    b) reckless behavior by the banksters.

    So long as these core issues remain unaddressed, low- and moderate-income citizens have every right to be angry when they hear politicians’ pious cant re. the need to “tighten their belts” etc.

    It’s ordinary people – pensioners, the unemployed, those with low skill levels – who invariably get hosed while their well-organized and politically powerful counterparts avoid any real cuts.

  • Eric J.

    Not that I doubt the chart, but I would like to see it in terms of per-captia spending.

  • Jim.


    Shall we take a page from Krugman’s playbook and say that these “austerity” measures haven’t been austere enough?


  • Jacksonian Libertarian

    “There’s a reason it’s called Capitalism; it’s because Capital is what fuels it.” Jacksonian Libertarian

    Without affordable capital for consumers and businesses to borrow, jobs cannot be created. At the present time developed nations are sucking the fuel tank dry, competing for capital with consumers and businesses, and crowding them out of the market with the unfair credit risk advantage of a Central Government. The US Government is taking well over $1 Trillion a year from the fuel tank, and has taken $6+ Trillion since 2008. That is $6+ Trillion that would have been used to buy consumer items like homes, cars, appliances, restaurant meals, or for businesses to start up or expand to create the jobs to meet those consumer needs.

    So many look at the Capital markets like they are some bottomless pit of money; instead of being a limited supply of money, the demand for which determines the price in interest rates. When the Government comes in and bites off a big chunk of that capital every year, the remaining supply goes up in price in order to reduce demand.

    It is Government greed that has killed all the jobs, and prevented a normal recovery. And it will be getting the Government out of the capital markets and even pumping money into the capital markets by paying off Government debt that will give us the new jobs we so desperately need. That is what I believe austerity means, not what the Europeans are calling austerity which is apparently just keep spending.

  • Otiose8

    Austerity means to most people using the term some variation on higher taxes and a moderation in the increase of government spending.

    To this viewpoint a dollar spent by the government is no different than one spent by the private sector and both would count equally towards GDP growth.

    This form of austerity is then faulted for not allowing or encouraging economic growth when it fails to restore fiscal balance or promote growth.

    However, spending by government and the private sector do not behave the same way as the funds move through the economy. Private spending has a chance to actually create new value whereas government spending has almost no probability of doing more than transferring resources to nonproductive uses.

    And that’s basically why the idea the government can step in to substitute for private spending fails to create sustainable economic activity and acts as a drag on real growth.

    While it’s true that initial significant cuts in government spending result in a slowing of activity this is a natural result as people have to explore new ways to redeploy their resources towards productive ends as the flow of funds is reduced or cutoff.

    Examples in the past include the cuts in government outlays in the early 1920’s which resulted in the boom of the mid 20’s (as compared to the failed Keynesian attempts in the 30’s). Or in more recent times the failure of Obama’s stimulus and our persistent difficulties, or Sweden’s experiments in balancing government with private activity to create a balanced and sustainable model.

  • Lorenzo

    It’s monetary austerity that is the underlying cause of the crisis.

  • Felipe Pait

    It looks as if the data was tortured by Tyler Cowen and his associates before publication. If so the confession is not admissible in scientific court.

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