Commentary | Budget, Taxes, and Public Investment

Europe’s Self-Defeating Austerity

A version of this commentary originally appeared on U.S. News and World Report.

In this op-ed for US News and World Report, EPI Research and Policy Director Josh Bivens explains how austerity has prevented economic recovery in Europe.

“Is Europe right to abandon austerity?” is a question on par with “Should Europe stop hitting itself between the eyes with a hammer?”

The answer is obvious, but sadly might be premature – it is far from clear that Europe is indeed abandoning austerity. But it clearly should.

In the middle of 2009, the Great Recession had officially ended in both the U.S. and the eurozone, and the unemployment rate in both economies was roughly 9.5 percent. Since then, the U.S. economy has made agonizingly slow, but steady, progress towards recovery, and unemployment was 7.3 percent in the first quarter of 2013. The eurozone economy has, instead, declined steadily for 18 months, and unemployment in the most recent quarter was 12 percent.

These different paths were driven predominantly by differences in fiscal policy: the U.S. managed to avoid rapid fiscal contraction at the federal level until this year. Sadly, just as policymakers in the eurozone seem to be having second thoughts about their rush towards austerity, the U.S. economy (thanks mostly to the mindless sequestration put into place during the debt ceiling debacle of 2011) is now on austerity auto-pilot.

Given that the misguided global rush towards austerity is putatively driven by fears of rising debt, it’s useful to assess just how successful it’s been in reducing nations’ public debt burdens. Paul De Grauwe and Yuemi Li have shown that austerity is actually self-defeating even in narrow fiscal terms. Because austerity causes such grave damage to economic activity, tax revenue plummets, safety net spending rises and public debt ratios rise. Austerity’s broader costs are obviously much greater: unemployment in several periphery countries is over 14 percent.

The real eurozone tragedy is, of course, that austerity was thrust upon many of these countries. Because Greece, Ireland, Spain and Portugal borrow money in a currency they don’t control, they could be forced into potential default by bond markets. Countries that borrow in a currency they do control – the U.S., the U.K. and Japan, for instance – have no such excuses for bad decisions. The U.K.’s fiscal contraction brought predictably disastrous results. The U.S. is steadily drifting into fiscal contraction after admirably avoiding it for years. And Japan under Prime Minister Abe has definitively rejected the economics of austerity. I’m betting a year from now, the benefits of that decision will be obvious.

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