Since the global financial crisis hit in 2008 and the subsequent recession/depression in world economies there have been two “cures” advocated by governments. The first one argues that in order to repair the economies, governments have to increase their spending, despite running huge budget deficits. The second approach is one of austerity, where government spends less in order to control the gap between spending and tax revenue.

 

Hardly a day goes by where we do not hear a politician, journalist or celebrity economist in Europe or North America, talk about how the European approach to the crisis through austerity is failing miserably. But how true is this statement? And can it actually be backed up by facts?

 

In this article I will first define what is meant by austerity and then take a look at official data from the European Union to try and back up the claim that “Austerity is failing”.

austerity is failing

What Is Austerity?

The word is thrown at the public so much these days that I doubt many people have stopped to actually get a definition of what austerity is. Most commentators have simply concluded that because some countries’ governments are talking about austerity (e.g. UK and Ireland) that those same countries are actually implementing austerity measures.

 

So, let’s look at the Investodepia definition of Austerity: “A state of reduced spending and increased frugality in the financial sector. Austerity measures generally refer to the measures taken by governments to reduce expenditures in an attempt to shrink their growing budget deficits.”

 

What this means is that governments target an actual reduction in spending from one year to the next. If a state spends $X in one year, then it would have to spend less than $X in the next year, in order to successfully implement a program of austerity.

 

Is Austerity Being Implemented In Europe?

The best way to answer this question is to look at actual spending data for European countries, and thankfully Eurostat, the European Union’s statistics office, provides all this data to the public.

 

The data reveals some interesting facts. In 2008, the first year of the crisis, there wasn’t a single country in Europe that reduced its spending. This resulted in an average spending increase of 3.82% for the 27 EU member states; so no austerity here.

 

Since then various countries have fallen into extreme difficulty with high unemployment, low to no GDP growth and mountains of debts. The question is whether countries have actually reduced spending in a significant and meaningful way. First let me highlight the UK, which has not reduced spending at all. Quite the opposite is the case with increases of 11.17% (2008), 4.41% (2009), 2.68% (2010), 0.11% (2010). The rate of increase has declined, but that is not the definition of austerity.

 

The same goes for Ireland. While there was a reduction of spending in 2010 of 26.35%, that was simply due to a 33.07% increase in 2009 for its bailout of bank bond holders. So, no real austerity here either.

 

In 2010 Greece finally started reducing its spending by 8%, but only after having increased it by 11% in 2008 and 6% in 2009. And the only reason they are finally doing this is because they simply cannot get the money to support their spending habits.

 

The very same can be observed country by country. France, Belgium, Finland, Denmark, Poland, none of these countries have reduced any of their spending.

 

But there are a couple of countries that have proven reductions in government spending.

 

What Countries Are Implementing Austerity?

There are a couple of countries that have reduced spending and done so in a considerable fashion. What I mean by that is a decrease in spending by more than 1% and for more than just one isolated year.

 

Those countries are:

  1. Latvia, which decreased spending by 8.13% in 2009 and 2.13% in 2010 (Total 10.26%)
  2. Estonia, which decreased spending by 2.76% in 2009 and 7.17% in 2010 (Total 9.93%)
  3. Lithuania, which decreased spending by 3.35% in 2009 and 3.35% in 2010 (Total 6.7%)

 

Many politicians, the media and Keynesian economist would have us believe that such actions would be absolutely detrimental, even suicidal, especially during a crisis, and that this would result in massive job losses and a reduction in GDP. Now the question is what happened in those three countries after these cuts took place.

What Effect Has This Had On Those Countries?

Let me take you back to Eurostat which also collects data on GDP for each of the member states. This makes for some more very interesting reading.

 

If you sort European countries by GDP growth in 2011 you get the following top three spots:

  1. Latvia with 11.66%
  2. Lithuania with 11.59%
  3. Estonia with 11.37%

 

These are the very same countries as mentioned above, in almost the same order!

 

What Has Happened Since 2010?

Since their drastic spending decreases two of the three countries have reverted to spending increases. The two are Estonia with a 5.12% increase in 2010 and Lithuania with a 2.22% increase for the same year. But Latvia has continued for a third straight year with further spending decreases of 2.99%.

 

This has led to a situation where Latvia is now leading the three Baltic States in GDP growth for 2011, with 6.92%, while the other two have dropped to below 6% growth. In other words, austerity is actually working for Latvians.

 

Conclusion

Based on facts presented by official EU sources there can be only one conclusion. European austerity is failing only in countries where no austerity is actually being implemented. Those countries that do implement spending reductions are seeing significant benefits in their economies.

 

Other Articles Of Interest:

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What is inflation?

Warren Buffet Pays Less Taxes Than His Secretary - Is This Really True?

Did The Glass Steagall Act Repeal Cause The 2008 Financial Crisis?

What Is Quantitative Easing (QE)?

A History Of The US Dollar

 

Photo credit: KayaMarArt