The Austerity Paradox: I See Austerity Everywhere, But Not in the Statistics
27 Pages Posted: 5 Mar 2013
Date Written: February 28, 2013
The core thesis of the paper is that taking a close look at the actual statistics available from Eurostat on the PIIGS-countries plus Cyprus, one finds little empirical evidence that the governments there have de facto reduced their total public expenditures. This is in stark contrast to the current austerity debate, which seemingly implicitly assumes that austerity has occurred over the past couple of years since the global Great Economic Crisis broke out in 2008. Therefore the author calls this empirical finding the austerity paradox. Many critics of the austerity policy of the current EU-member countries turn to this fact a blind eye. They point to the paradox of thrift as Keynes has named the contradiction that attempts to bring down a public deficit accomplished the opposite. Hayek instead pointed out the opposite weaknesses related to extensive public deficit spending and extreme low nominal interest rates which leads to significant malinvestments in end, since the long-run interest rate will sooner or later return to its long-term market value. Furthermore the paper gives empirical evidence about the outcomes of the ECB monetary support given to the crisis countries combined with the EFSM/EFSF/ESM together with the IMF as has been recently made public by the ECB and the German Ministry of Finance. These data show that a significant amount of debt refinancing of the PIIGS-countries just now is done by these channels at very low interest rates. Therefore the bailout of the crisis countries has already led and will even more lead so in the future to a transfer union of the Euro area based on Eurobonds issued by the respective emergency lenders. On top of this now the ECB since last August promised to buy unlimited amounts of debt of member countries, which would make it very unlikely that austerity in the sense of lower public spending will occur in the PIIGS-countries in the foreseeable future. More likely is debt forgiveness for the PIIGS-countries at some time in the future as for Greece in a first step has already been done before. This contradicts the official interpretation that austerity is the primary source for the current high unemployment and recession in these countries.
Keywords: austerity, austerity policy, transfer union, Eurobonds, haircut
JEL Classification: E43, E61, E63, E65
Suggested Citation: Suggested Citation