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Austerity In Europe Is Failing - Is This Really True?

By Edited Nov 13, 2013 1 7

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.



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:

What is a bank run?

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



Mar 7, 2013 9:49am
Hi--While I am a long wayfrom being an econmist, I enjoyed your article a lot because it is such a food-for-thought piece. What I think is that both Europe and America would be far better off by returning, with a few modifications, to the common sense theories or Von Mises. (I would love to have your opinion on this one of these days).

As for government spending, it is and has been so far out of common sense tactics that both visible and invisible taxation brings up images of the Sheriff of Notingham stealing from the poor to give to the elite.

As far as the recent depression--and that's what it was--it was caused by greed, nepotism and good-old-boy politics--their is apparently no conscientiousness in the White House that is supposed to be "for" and "by" the people. The gap between government and the people can be measured by the gap between rich and poor, expanding year after year.

I simply can't understand why we keep talking about a democracy when we are cleary a plutoocracy; the roots of our financial system by any other name. Good article--2 BIG thumbs up and a rating.

Mar 7, 2013 1:02pm
Hi Marlando, I am delighted you found this food for thought, as that is what I think people need to do more rather than just swallow what they are told.
I am a big fan of Mises and have studied most of his works, I might think of a topic to write about that would include his theories.
I agree with you that our political system is extremely broken, but I simply see no appetite in the public to do what is right to reduce the power of politicians rather than increase it.
I also agree that what we experienced is a depression, but I would disagree with referring to it in the past tense. In my opinion it is not over and the worst is yet to come when all the government debt for Keynesian stimulus and bailouts explodes.
I would also go as far as saying that unrestrained democracy is very much at the heart of our problems. You have politicians promising to give something to large groups of people by taking from others. No matter how detrimental the outcomes of such policies are in the long term, these promises get you elected. I believe we need stronger constitutions that restrict what politicians can do to avoid mobocracy; regulation of government rather than private industry.
Mar 7, 2013 3:30pm
Thank you and beyond all else--a BG YES on government regulation!
Mar 7, 2013 12:42pm
Austerity measures cut down a struggling economy fast. Ireland and Greece have suffered extreme economic downturns since introducing austerity measures. Keynesianism on the other hand, is actually well established as working in depressed economies, as the economy is an interactive system which benefits from increased stimulation from above.
Mar 7, 2013 12:51pm
This is exactly the problem, i.e. people believe that countries like Ireland actually are implementing austerity. To this day Ireland has not cut one cent in current government spending, even when excluding the bailout of bank bond holders. Spending in Ireland was higher in 2012 than in 2011, and so far this year spending is up on the same period last year. Ireland is talking about austerity, but is doing Keynesian stimulus, which in fact has never worked.
Apr 6, 2013 3:58pm
To understand better your point, I took a closer look into the GDP Data using the link in your eye-opening article.
In 2009, the GDP's of the three European Baltic states went also down significantly. Can we conclude that their situation is better thanks to austerity? Over the three year period 2009-2011 they sure perform better then the unfortunate economies of Greece and Ireland, but worse then most other mentioned countries.
Apr 9, 2013 3:45am
Hi mmtt8, thanks for your comment and it is a very good observation.
As you mention, the Eurostat data points out that in 2009 Estonia, Lithuania and Latvia had shrinking GDP of -15%, -18% and -19% respectively, which are huge amounts. But this can be explained by the spending data for the year immediately before, 2008. Here the same countries increased spending by 18%, 21% and 19% respectively. Compare that to an EU average of 4% for that year and you get the picture. The only countries that increased spending more were Bulgaria and Rumania.
This is ultimately the theory I am trying to poke holes in: If increased spending is the solution then why did massive increases in spending in the Baltic states result in huge contractions the following year, while big decreases in government spending resulted in the exact opposite?
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