Beyond the Austerity Myth or What?


EC Director General Marco Buti and Nicolas Carnot have recently attempted to debunk the “austerity myth”, alleged by critics to be the EU’s crisis resolution mantra. In their ECFIN Economic Brief of March 2013 “The debate on fiscal policy in Europe: beyond the austerity myth” they endeavor to refute 5 allegations, that there was “irrational panic in the sovereign bond markets” (1), the “the adjustment is too front-loaded” (2), that “the Commission follows an inflexible approach” (3), that “fiscal consolidation is not politically or socially sustainable” (4), and that “the Commission’s approach is one-sided [and] puts all the burden of adjustment on debtor countries”(5).

As one of the critics of the EU’s approach, manifested in several posts in this blog, I think that their endeavor is not successful. While Buti and Carnot launch an understandable defense of the EU’s approach, their arguments are weak, they are more statements than thought/through refutations. Moreover, they ignore one of the strongest arguments of the critics, namely that the EU’s singular concentration on individual EU and EZ countries omits to take account of the fiscal position of the EU/EZ as a whole and of the effect of all EU/EZ countries’ consolidation policy on the weakest countries of the EU. In this way, they negate the hoped-for effects of a fiscal union.

While the authors proudly confirm the EC’s flexible approach (all. 3) on the account of having postponed two times the deadlines for consolidation, they omit the fact that the unexpected length of the recession (double-dip, triple-dip) is likely the result of the joint consolidation efforts by EU/EZ countries and that consequently the whole consolidation strategy might be in need of change. I would argue that the fact that in the authors’ rebuttal there is no consideration of the effects of consolidation on GDP growth constitutes a significant weakness. Also, when they refer to the fact that in 2009/10 the EU-wide stimulus packages were accompanied by commitments to be followed by fiscal retrenchment, and thus confirm that present EC policies are the fulfillment of these commitments, I would argue that the unexpected length and depth of the recession (the EZ’s GDP is still below that of 2007) should have led to a policy change.

Buti/Carnot also argue that critics, while condemning the front-loading of “adjustment” (all. 2), do not provide a detailed alternative (p.2). However, many critics have provided alternatives and thus have not “evacuated the hardest issues faced by policymakers” (see e.g. the EU-sponsored project on a European growth strategy, led by the Austrian Institute of Economic Research wwwforEurope, deGrauwe, and many others).

They also argue (all. 1) against the purported irrationality of bond markets. While they agree that “markets are prone to excessive swings”, they state that this need not imply that markets acted purely out of irrational fear in the sovereign bond crisis. Their proof is that bondholders lost during the Greek crisis (yes, but what about the earlier years when before the crisis the bond spreads were non-existent?), and that sovereign spreads were and are at least loosely correlated with the underlying fundamentals. Is that still true when one compares spreads before and after 2008? Is this sanguine assessment an adequate basis for policy-making? I am rather skeptical.

Some of the macroeconomic data of the crisis countries have recently improved. Buti/Carnot mention structural fiscal balances, external and relative competitiveness positions as proof that the chosen strategy is working (all. 1). I would argue that some of these improvements, especially those referring to competitiveness, are temporary effects caused by the recession and not structural improvements. In any recession, external balances tend to improve, because the ability of the economy to import is restricted. Structural improvements depend more on the export side, the variety and quality of exportable products in the face of global competition.

That fiscal consolidation might not be politically sustainable (all. 4) is treated in a strange way, because there no arguments pro or con are being advanced, but only exhortations that consolidation should also promote structural change. Yes, but? No mention is made of unemployment, of the rapid increase in youth unemployment, of the violent demonstrations in Greece, Portugal and Spain, of the fact that all governments were voted out of office where elections took place, the rise of left and right populist parties, etc., etc. How much more manifestations of political non-sustainability do the authors still need?

The discussion of all. 5, whether the EC’s approach puts all the adjustment burden on debtor countries, is welcome and surprising after the previous pages. The authors acknowledge fully the need for a more symmetric adjustment, that also creditor countries have an obligation to fuel demand by tax, labor market and product market reforms, but deplore the lack of available instruments. However, the current balance adjustment requirements in the Europe 2020 strategy are – again – asymmetrically directed towards deficit countries. The authors also admit, that the Commission’s proposal for a “dedicated stabilization fund” should be considered only in the longer run, thus has no place today.

This is a disappointing paper. It staunchly defends the present EU approach to crisis resolution, without mentioning the fact that the single-minded emphasis on budget consolidation and the weak and subjugated efforts towards growth are responsible for the extended and ever more severe recession (viz. the increasing unemployment rates, especially of youths). The paper remains within this chosen framework and does not even hint at a possible policy change. The defensive arguments are weak, they consist mainly of non-substantiated statements. A thorough refutation of the many arguments by critics would have been in place. This chance has been missed.   

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4 Comments

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4 responses to “Beyond the Austerity Myth or What?

  1. Dr. Peter Neumann

    Lieber Kurt!
    Wieder hast du auf zentrale Fragen aufmerksam gemacht. Vielleicht auf die ganz wichtigen für Entscheidungsträger auf nationaler wie – besonders – auf EU/EZ Ebene.
    Als EU Bürger mit wirtschaftlichen Hausverstand und juristisch geprägtem Gerechtigkeitssinn interessiert mich die richtige – und optimale – Verteilung zwischen Defizit- und Überschuss-Ländern der ökonomischen Massnahmen, die zur Bewältigung der Krise gesetzt und getragen werden müssen.
    Es scheint nicht möglich zu sein einen Antwort zu finden bloss durch Anwendung einer Kalkulation mit volkswirtschaftlichen Daten. Ebenso sinnlos (und entfernt vom Hausverstand) wäre es die EU/EZ Verträge unter die völkerrechtliche Lupe zu nehmen um dadurch genau zu erkennen welches Mitgleid und welche Institution wofür Verantwortung tragen sollte. Es handelt sich um eine eminent politische Fragestellung und die Lösung muss also politisch sein.
    Aus meiner Warte muss eine Lösung nicht nur wirtschaftlich wirksam, sondern auch politisch haltbar sein um damit die Zukunft der EU/EZ absichern zu können. Ein Rückblick auf die vielen Versäumnisse genügt alleine nicht.
    Also, nach welchen Kriterien die Lasten verteilen ? In Anbetracht daß die EU so wie auch die Eurozone gemeinsame Projekte der Mitgliedstaaten sind, würde es meinem politischen Hausverstand genügen die Lasten so zu verteilen, daß die Hälfte von den Defizit-Ländern und die andere Hälfte von den Überschuss-Ländern getragen wird, entweder direkt oder durch Einschaltung der gemeinsamen Institutionen wie EZB, ESM etc.
    Aber in welchem Land ist der Solidaritätsgedanke stark genug um eine solche Argumentaiton zu tragen ??

    Mit freundlichen Grüßen

    Peter Neumann

    • kurtbayer

      Peter: ich glaube nicht, dass man mit einer Pauschalregel auskommt, da die Situation jedes einzelnen EU-Landes sehr unterschiedlich ist. Aber wenn es zB persistente Leistungsbilanzungleichgewichte gibt, dann muessen die Anpassungslasten symmetrisch von jedem einzelnen Land getragen werden, aber diese “Lasten” schauen eben dann unterschiedlich aus. ZB muessten Deutschland, Finnland, Oesterreich hoehere Lohnsteigerungen zulassen oder generieren, um die heimische Nachfrage zu stimulieren und nicht nur auf “internationale Wettbewerbsfaehigkeit” zu setzen. Die Defizitlaender muessten sowohl ihre wirtschaftliche Basis erweitern (nicht nur Tourismus und Landwirtschaft), sondern eine Industrie aufbauen, die sowohl die heimischen Maerkte wie Exporte versorgen kann.

  2. Walter Ötsch

    Sehr geehrter Herr Bayer,

    ich habe die Begegnung mit Ihnen sehr genossen, auch der Vortrag war für mich anregend.

    Darf ich Sie bitten mir Ihre Postadresse zu senden, Sie bekommen dann ein Exemplar meines Buches. Ich ersuche auch um die aktuelle Emailadresse.

    Ich freue mich auf weitere Kontakte.

    Mit lieben Grüßen

    Walter Otto Ötsch (www.sozialekompetenz.org/oetsch)
    Zentrum für soziale und interkulturelle Kompetenz (www.sozialekompetenz.org)
    Institut für die Gesamtanalyse der Wirtschaft (www.icae.at)
    Johannes Kepler Universität
    A-4040 Linz, Austria
    Tel.:+43-+732-2468-3400 oder 3402
    walter.oetsch@jku.at

    • kurtbayer

      Ja, ich habe meinen Linz-Ausflug in all seinen Manifestationen sehr anregend gefunden.
      Ich schicke Ihnen meine Adresse per email
      Kurt Bayer

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