French, Greeks vote against imaginary austerity
posted at 2:07 pm on May 7, 2012 by Karl
Paul Krugman and other lefties are rejoicing over the results of the French and Greek elections (even if markets are not) as a rebuke against European “austerity” programs. However, it is worth remembering that those attacking “austerity” programs in Europe are also fond of claiming Congressional Republicans are backing “draconian cuts” in the size of government, all evidence to the contrary. As the Mercatus Center’s Veronique de Rugy notes in a new paper:
If there is austerity in Europe, in most cases it hasn’t taken the form of massive spending cuts.
Following years of large spending expansion, Spain, the United Kingdom, France, and Greece—countries widely cited for adopting austerity measures—haven’t significantly reduced spending since “austerity” supposedly started in 2008. When spending was actually reduced—between 2009-2010 in Greece, Italy, and Spain—the cuts have been relatively small compared to the size of bloated European budgets. Meaningful structural reforms were seldom implemented. Instead, whenever cuts took place, they were always overwhelmed with large counterproductive tax increases.
This so-called balanced approach—some spending cuts for large tax increases—has been proven to be a recipe for disaster by economists. It fails to stabilize the debt, and it is more likely to cause economic contractions.
That summary excludes Ireland, but as Kyle Wingfield notes, the top marginal tax rate there rose 17 percent amid a global recession. In contrast, Estonia, Lithuania and Latvia have bounced back strongly after adopting strict austerity measures and vastly reducing government indebtedness. The finding that the big-tax, “balanced” approach to fiscal consolidation generally fails is consistent with prior studies from the OECD and IMF.
So what is the effect of the Greek and French elections? Maybe not much. As Rick Ackerman reminds us, “even the socialists in Greece’s parliament were forced to support austerity measures a few months ago, because without such measures the country would have been unable to borrow enough cash to meet payroll.” As for France, even Jukebox Mafioso Matt Yglesias acknowledges:
[O]ne very plausible story of what happens next is simply that the European Central Bank will decide it needs to bring the continent’s newest leader to heel. If the ECB signals that it will only support the French banking system and the French economy if Hollande sticks with the status quo program, then Hollande may well have no choice. Elections in Europe aren’t necessarily what they used to be.
Or, as Iowahawk bluntly tweeted to Greece: “[Y]ou can vote against austerity all you want. Austerity doesn’t give a sh*t about election results.” Also: “French vote out austerity, gravity; prompts new fears of airborne flocks of rich, drunk flying Frenchmen.”