Posted by: Dirk | September 17, 2015

What austerity? Welcome to Planet Germany!

I was reading Sueddeutsche Zeitung lately and the survey of German economists was quite enlightening. Apart from the fact that over 90% says the that increased government spending leads to more growth (if not always, than at least under some circumstances) the other surprise was that a full third of German economists dismiss the idea that Europe went through austerity policies! In the words of John McEnroe: You cannot be serious!

I do wonder how German economists can have this idea. If anybody has some information on the source that apparently influenced the economists’ minds, please let me know. A cursory look at data from Eurostat reveals some serious austerity when we compare data from 2014 with that of 2010 (when austerity started in Greece):

austerity

All countries in green had a lower share of total government expenditure of GDP in 2014 than in 2010. I would argue that a fiscal stance which leads to this result is definitely not expansionary, but probably contractionary. Whether it constitutes full-blown austerity is open to discussion of course, but I want to get a rough picture before entering into details. It seems that Italy, Belgium, Sweden and France are slightly expansionary, and some countries outside of the euro zone. The case of Cyprus illustrates that government spending includes bail-out costs when banks have been receiving government money, which has distorted the picture. In most countries, the bail-outs happened pre-2010 so it does not distort the picture.

Here is a paragraph from the 2015 memorandum of understanding that Greece signed:

Restoring fiscal sustainability (section 2): Greece will target a medium-term primary surplus of 3.5% of GDP to be achieved through a combination of upfront parametric fiscal reforms, including to its VAT and pension system, supported by an ambitious programme to strengthen tax compliance and public financial management, and fight tax evasion, while ensuring adequate protection of vulnerable groups

For those who do not understand economese, a primary surplus is tax income minus government spending before interest payments of the debt. So, no, the Troika did not tell Greece to cut government spending. However, the Troika told Greece that tax income minus government spending before interest payments has to equal 3.5% of GDP. So, Greece cut government spending, and more than once.

Summing up, I cannot understand how a third of German economists can deny that governments in the euro zone cut spending which are fixed in the “negotiations” with the Troika.


Responses

  1. typo in:
    “All countries in green had a lower share of total government expenditure of GDP in 2014 than in 2014”

    • Thank you. Just fixed it.


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