Photo: AP/Petros Giannakouris
A fierce debate is raging within Europe over the question of austerity. Some argue that countries within the euro zone, and on the periphery especially, have no choice but to embrace savage budget cuts.Others point out that the crisis is about more than just budget deficits, that some countries have room to cut less, and that austerity across the euro-zone as a whole should be pursued at a slower pace.
And some, I’m somewhat stunned to find out, allege that there is no austerity. Veronique de Rugy posts a chart showing what appears to be just a tiny drop in spending across some euro-zone countries and no drop at all among others (Britain is thrown in, for good measure). Austerity is mostly a myth, she claims, and what austerity there has been has come from tax increases, which don’t count. No less an authority than Tyler Cowen quickly gloms on to the argument.
This is nonsense, as a quick check of the data reveals. The supposed absence of austerity in Ms de Rugy’s figures is mostly a product of poor graph scaling and a reliance on nominal, absolute figures. If we instead turn to data from the International Monetary Fund’s WEO database we see, first and foremost, that budget balances are in the process of improving dramatically:
Progress through last year is quite striking, given that the crisis only began in earnest in 2010. It has occurred despite truly pitiful growth (and ongoing recession in Greece). And there is more to come.
But what of the complaint that this is all due to tax increases, which don’t count, for some reason? That, too, is mistaken:
The spending cuts are there, in spades. Of course, the importance of spending cuts in episodes of austerity derives from the view that they are more likely to “stick” than tax rises, and that they are critical in generating “expansionary austerity”. But this is no iron law of fiscal consolidation. Rather, as a recent IMF paper pointed out, it is due to the fact that central banks are more likely to accommodate spending cuts with aggressive easing than they are tax rises.
The austerity is there. If it isn’t working out as many expected, that’s either because what they expected was unreasonable, or because the central bank isn’t doing its part.
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