Austerity Depresses GDP in Europe

Europe’s leading politicians and bureaucrats are getting increasingly desperate over the fact that their austerity policies are not turning troubled economies around. In order to fix this problem they have drafted a model for centralizing fiscal policy powers to the hands of the EU leadership. This is a bad idea for a host of reasons, one being that it further erodes what remains of member state sovereignty. Another reason is that it will apply one-size-fits-all fiscal policy to the entire euro zone (and over the long term to the entire EU). With that comes standardizing both taxes and government spending, with consequences that few if any European governments have begun contemplating.

One consequence will be a decisive drop in economic activity across the euro zone. We can already see what this means in GDP data published by Eurostat. More on those numbers in a moment; first, let us get an update on how far the Eurocrats have come in centralizing fiscal policy. EurActiv reports:

France’s Socialist-led government today (19 September) kickstarts ratification of a European Union budget discipline pact it grudgingly accepts as the next step out of the euro debt crisis. Meanwhile, another EU treaty for further political integration is already in the pipeline. Created in March by President Fran├žois Hollande’s predecessor Nicolas Sarkozy and 24 other EU leaders including Germany’s Angela Merkel, the fiscal compact requires eurozone countries to slash their public deficits or face legal action and possibly fines.

This means, plain and simple, that the centralized fiscal policy authority will double down on destructive austerity policies, thus making it impossible for member states to experiment with structural reforms to their welfare states, including deregulation, outsourcing and privatization. The fiscal central heating system will be all about bringing about a static balance by means of chainsaw-style spending cuts and destructive tax increases.

Just as they have tried in Greece, Spain and Portugal, to mention only three austerity experiments gone wrong.

EurActiv again:

Its entry into cabinet on Wednesday paves the way to likely approval by French parliament in coming weeks, despite noisy dissent within Hollande’s left-leaning coalition and growing disenchantment with the European Union among a French public facing 13-year jobless highs and fearing worse to come. … The pact is due to be submitted to the French parliament in early October. It should pass through easily if, as they have stated, some of the deputies in Sarkozy’s conservative UMP party vote for it.

So what would the consequences be of centralizing fiscal policy and thus making austerity the norm for all of the euro zone? Well, let’s take a look at what Eurostat has to offer. They recently published a GDP forecast for 2012 for member states and reference countries, a total of 36 nations, as well as estimates for 2013.

Going back to 2004 we thus have ten years of macroeconomic data to review. The first five years, 2004-2008, were supposedly “good” years while the years 2009-2013 can safely be said to be recession years. Here are the average growth rates for the 36 countries for the two periods:

Table 1 – Average GDP growth, adjusted for inflation

2004 to 2008 2009 to 2013
Belgium 2.34 0.52
Bulgaria 6.44 -0.20
Czech Republic 5.46 0.24
Denmark 1.78 -0.24
Germany 2.00 0.90
Estonia 5.72 0.58
Ireland 3.46 -0.86
Greece 3.00 -3.68
Spain 3.08 -1.14
France 1.80 0.42
Italy 1.06 -0.86
Cyprus 4.18 -0.16
Latvia 7.30 -1.46
Lithuania 7.14 -0.32
Luxembourg 4.44 0.44
Hungary 2.74 -0.64
Malta 3.00 1.20
Netherlands 2.66 -0.26
Austria 2.76 0.70
Poland 5.40 3.02
Portugal 1.24 -1.24
Romania 6.84 -0.28
Slovenia 4.92 -1.34
Slovakia 7.28 1.46
Finland 3.40 -0.02
Sweden 2.88 1.58
United Kingdom 2.18 0.16
Iceland 5.38 -0.70
Norway 2.36 0.82
Switzerland 2.98 1.12
Montenegro 6.96 0.40
Croatia 4.10 -1.74
Macedonia 5.02 1.84
Turkey 6.02 4.12
United States 2.18 1.04
Japan 1.32 0.36

 

Every single country has experienced a slowdown. However, some countries have suffered more than others. The five countries that have experienced the most dramatic drop in growth are: Greece, Portugal, Italy, Croatia and Spain. As we all know, Greece, Portugal and Spain have suffered dramatically under very harsh austerity pressure from the EU. Italy is also drifting in to the austerity shadowland.

In the case of Greece, Portugal and Spain, the shift from growth to GDP contraction exhibits a remarkable correlation with the implementation of austerity:

Table 2 – GDP and austerity

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Greece 4.4 2.3 5.5 3.0 -0.2 -3.3 -3.5 -6.9 -4.7 0.0
Portugal 1.6 0.8 1.4 2.4 0.0 -2.9 1.4 -1.7 -3.3 0.3
Spain 3.3 3.6 4.1 3.5 0.9 -3.7 -0.3 0.4 -1.8 -0.3

 

Austerity has been an active fiscal policy agenda in the EU, for “troubled” countries, since 2009, though the really tough measures did not reach Portugal and Spain until about a year later. Nevertheless, as these numbers clearly show, Grece has only gone from a bad growth situation (-0.2 percent in 2008 and -3.3 percent in 2009) to an outright macroeconomic freefall in ’10, ’11 and ’12. In fact, some forecasts for 2012 expect up to seven percent GDP contraction, which would obviously put 2013 in the red as well.

The Spanish economy is also contracting more after the government put austerity to work, and the Portuguese are beginning to feel the squeeze of their spending cuts and tax increases.

By contrast, let’s take a quick look at three countries that have not gone for harsh austerity:

Table 3 – GDP and absence of austerity

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
United States 3.5 3.1 2.7 1.9 -0.3 -3.1 2.4 1.8 2.0 2.1
Finland 4.1 2.9 4.4 5.3 0.3 -8.5 3.3 2.7 0.8 1.6
Switzerland 2.4 2.7 3.8 3.8 2.2 -1.9 3.0 1.9 0.9 1.7

 

This does not mean that these countries are doing well overall, nor does it mean that the U.S. perennial-deficit policy is a good one. The American economy is to some degree a different animal due to its sheer size, and to the reserve currency status of the dollar. Nevertheless, these numbers show that in the choice between doing nothing about a deficit, and trying to close it with austerity, you are better off doing nothing.

Long-term, though, the American deficit is going to come back like a macroeconomic boomerang. In fact, that long-term is not very long term anymore: the U.S. credit rating recently took another beating which shows that we are rapidly maxing out our credit. Once we get to the point where borrowing is impossibly expensive, Congress will in all likelihood pull out the fiscal chainsaw.

Austerity, in other words.

That must not happen. Neither we nor the rest of the world can afford an America with an economy in Greek free-fall. Instead, we need structural reforms that permanently shrink government, cut taxes and return government-seized responsibilities – a.k.a., entitlements – to the citizens.

It can be done. It must be done. Let’s do it now.