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European Commission’s Own Economist Argues Austerity Made Things Worse

By Alan Pyke on October 23, 2013 at 4:03 pm

"European Commission’s Own Economist Argues Austerity Made Things Worse"

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A new paper from European Commission (EC) economist Jan in ‘t Veld argues that the region’s commitment to deficit reduction over economic investment helped deepen and lengthen the Eurozone’s record-long recession.

According to in ‘t Veld’s analysis, the international officials who urged austerity have sharply underestimated the costs of those policies. Austerity imposes two or three times as much economic drag as International Monetary Fund (IMF) and other pro-austerity officials have been assuming in the process of forming policy recommendations, he found.

The economic pain the IMF, EC, and others forced on bailed-out Eurozone countries was exacerbated by the choice to cut spending in healthier economies like Germany’s. Since a common currency links the German economy to the others in the region, keeping spending level there could have helped curb the pain of austerity elsewhere. Instead, Germany cut spending, creating what in ‘t Veld calls “negative spillovers [that] made adjustment in the periphery harder” and helped drive the most perverse outcome of austerity: increasing debt-to-GDP ratios rather than decreasing ones.

According to the Wall Street Journal, the paper appeared online briefly on Monday via an official EC twitter account, and was later taken down. Ultimately the Commission re-published in ‘t Veld’s work.

The paper also finds that spending cuts bring sharper economic pain than do tax increases. Austerity packages recommended by the EC and IMF have tended to rely more on spending cuts than on tax increases. While the IMF has already acknowledged that it underestimated the pain of austerity in the case of Greece, it has shown no sign of a general walk-back in its policy recommendations. The Greek economy has shrunk by a full quarter under the austerity measures international powers have imposed on the southern European nation.

The paper adds to a mountain of evidence that austerity is the wrong approach to reviving a struggling economy. The Eurozone is finally emerging from a record-long recession thanks in large part to the easing of austerity requirements in several countries. Yet in the United States, the evidence from across the Atlantic may not be penetrating. The Republican Party is committed to retaining or even deepening the spending cuts known as sequestration. Despite ample reason to reset the fiscal debate to be around economic growth rather than even more deficit reduction, the policy debate in Congress isn’t about whether or not to cut program funding, but by how much that funding should be cut.

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