The Myth of European Austerity
By: Casey Given
For the past few months, champions of big government have gleefully pointed to Europe as an example of the dangers of so-called “austerity.” Citing the economic woes of welfare states like France and Spain, Keynesian bigwigs like Paul Krugman have asserted that the European “experience of the past two years” supposedly refutes “claims that slashing government spending would somehow encourage consumers and businesses to spend more.” Au contraire.
The fiscal reality of Europe’s troubles directly contradicts these tax-and-spend swindlers’ myth of austerity. As Veronique de Rugy exposed in a recent Mercatus Center study, most big name European countries in crisis have increased spending for the past several years. France, Italy, Spain, and the United Kingdom have bloated their budgets by billions since the global recession hit in 2008. Furthermore, most of these countries have coupled their spending increases with tax hikes as well, delivering a one-two punch to their economies. Indeed, Greece is the only recessionary European nation that has actually cut spending, and even that was coupled with tax increases.
Unsurprisingly, raising taxes and spending during an economic crisis is a recipe for disaster. Just when citizens most need more money take care of their families and businesses, the government takes more of it away. This negative effect on the individual level ripples throughout the economy, as people have less money to save, spend, and invest in the private sector that fuels the engine of prosperity. Governments can try to mitigate these negative effects with increased spending, but such expenditures are ultimately paid for by the taxpayer, thus further taking money away that could be better invested in the private sector towards greater productivity and more permanent jobs.
This simple economic truth ultimately explains why so many European countries so-called “austerity” has been unsuccessful. But, the failure is not because of draconian spending slashes as Krugman and other Keynesians would cry wolf. Rather, it is because of the continent’s spending addiction. If only Europe would listen to the wise words of one of her sons, the 19th century economist Frédéric Bastiat, she would know that increased spending in an economic crisis is “a ruinous hoax… which makes a great show of the little work that it has stimulated, which is what is seen, and conceals the much larger amount of work that it has precluded, which is what is not seen.”
Fortunately, some European nations have taken Bastiat’s words of wisdom to heart by implementing true austerity without the destructive tax increases. Take Estonia as an example. As Michael D. Tanner of the Cato Institute explains, the small Baltic state tightened its belt after the 2008 downturn by cutting public-sector wages by 10%, raising the retirement age to 65, reducing health benefits, liberalizing the country’s labor laws, and keeping its income tax flat at 20%. Four years later, Estonia’s economy has nearly bounced back to a pre-recession level, growing 7.6% last year – five times greater than the Eurozone average. Such impressive growth has prompted Krugman to dub the Baltic tiger as the “poster child for austerity defenders.” Estonian President Toomas Hendrik rightfully called out the Princeton professor on Twitter, providing no apologies for his fiscally responsible regime that created the conditions for private sector prosperity.
Big government buffs are right that the verdict is in on austerity. But, ironically, the European countries they point to as cases of austerity are actually following the tax-and-spend Keynesianism that they advocate themselves. In reality, tried-and-true cases of austerity have led to successful economic recoveries. In fact, the evidence in favor of austerity is not limited to a handful of anecdotal cases in the Baltics. In 2009, Harvard economists Alberto F. Alesina and Silvia Arganda studied 107 instances of fiscal adjustment around the globe from 1970 to 2007 to determine which economic policies lead to successful recoveries. Their conclusion: “[F]iscal stimuli based upon tax cut[s] are much more likely to be growth enhancing than those on the spending side.”
Thus, proponents of limited government should not be afraid of austerity, no matter how hard expenditure addicts try to make it a dirty word. Economic history is on the side of limited government; we just have to set the record straight. Perhaps after that, Uncle Sam can the austerity antidote needed to cure his economic ailment.