In one ear and out the other…
24.10.13
…that seems to have been how any advice (and evidence) on the downsides of austerity policy has been received by the powers-that-be in Europe. The latest twist in this story is interesting. The Wall Street Journal pointed out yesterday that the Commission has published a new working paper that actually adds weight to some of its critics.
The working paper, which includes the customary disclaimer that it does not necessarily reflect the formal views of the Commission, uses simulation techniques to assess the impact of fiscal consolidation measures taken between 2011 and 2013 in the euro-area (periphery and core). Its findings include the following (my comments in italics):
- The multipliers associated with the effects on GDP of fiscal measures are greater than tax/revenue based measures. In other words, if you’re trying to balance the books by spending less, it does more damage to the economy than if you tried to raise extra revenue. By the way, this result mirrors the concerns raised by an IMF working paper earlier this year that showed how the programmes designed for bailout countries had assumed ‘fiscal multipliers’ that were too low – i.e. the Troika hadn’t banked on how much damage the cutbacks would do to those economies;
- The spillovers of fiscal consolidation are large – i.e. when a country cuts spending it not only slows down its own economy, it slows down other economies as well. This has led to a worsening of GDP both by depressing demand and also by eroding competitiveness;
- Cutbacks in Germany, in particular, have worsened the overall economic situation; and
- A temporary fiscal stimulus in surplus countries could help boost output and help reduce current account deficits.
Great! So now even the Commission’s own economists are starting to acknowledge the potential unintended negative consequences of recent policy. They’ve seen the light! Or have they?
The WSJ piece points to a recent apparent change in Commission thinking around austerity, citing that “[recent guidance] has recommended a slowing down on fiscal consolidation for several countries in the euro area”.
Whilst this is encouraging, I’d be cautious about how much to read into it. I think we still have a long way to go in the debate about: what constitutes ‘sustainable public finances’; how to time any major structural adjustment; and the potential positive role for active policy focused on growth.
Frankly, the last few years have seen basic macroeconomic logic taking second place to the desperate – and somewhat headless chicken-like – attempts by European leaders to shore up the euro whilst hopefully fixing some of the flawed governance arrangements along the way. In doing this, the headless chickens have led to mass unemployment in the South, the rise of extremist political movements and, in some cases, rushed fiscal consolidation that might have generated quick cash but has damaged the delivery of core services – health being a case in point. Quite a risk to take to save face!
So – as late in the day as it is – it is encouraging to see that the Commission might be starting to take some of the evidence seriously. Time will tell to what extent this affects their future guidance to Member States, particularly through the European Semester process. Here’s hoping that sense prevails.
