Germany Poster Child for Austerity?

Daniel Gros wrote an op-ed in the Cyrpus Mail which asked: Has austerity failed in Europe? He is German, the director for CEPS an EU funded think tank, and got his PhD in Chicago. What caught my eye was this bid:

In fact, austerity has worked as advertised in some cases. Germany’s fiscal deficit temporarily increased by about 2.5 percentage points of GDP during the global recession of 2009; subsequent rapid deficit reduction had no significant negative impact on growth. So it is possible to reduce deficits and keep the debt/GDP ratio in check – provided that the economy does not start out with large imbalances, and that the financial system is working properly.

Sadly, I am not even surprised anymore.It is just annoying to see that German economists believe that austerity works; and therefore assume that it must be the reason for any positive development, which makes checking their numbers not a task they engage in. The actual story, of course has nothing to do with what Daniel Gros says. The current government has largely given up on, well, governing after about one year. At no point has Merkel increased taxes significantly, she never wanted to anyways, also expenditures weren't lowered at all. The increased tax revenue we are seeing comes from the increased employment numbers. In real terms general government expenditure has fallen, but this is due to inflation and not reforms. Here's the nominal values. (destatis)

2010 2011 2012 Total revenue 1087.38 1154.89 1193.63 Total expenditure 1190.97 1174.54 1191.28

So, he likes to tell stories that fit his believes, where numbers are not all that relevant, if they do not fit. But has austerity worked?

Austerity should thus always be beneficial for solvency in the long run, even if the debt/GDP ratio deteriorates in the short run. For this reason, the current increase in debt/GDP ratios in southern Europe should not be interpreted as proof that austerity does not work.

Right. Austerity not only not being expansionary, but also damaging the debt to GDP ratio should not be regarded as total failure. Spain and the USA both saw a housing bubble before the crisis and both countries imported more than they exported. The main differences being that Spain had a lower debt to GDP ratio to begin with, had to engage in austerity, and does not have her own currency. So what happened with GDP, the main indicator to judge the success of an economic policy, in these two countries?

 

This is what happens when the advisers know less than the politicians. Austerity is nnn absolutely catastrophic policy during a downturn, which is called a success on nothing but incompetence: Five years of absolute failure.

It is fitting that Germany now has become the poster child for austerity, even though the country has not engaged in any such policy.