Europe’s Austerity Disaster
Joseph Stiglitz
“If
the facts don’t fit the theory, change the theory,” goes the old adage.
But too often it is easier to keep the theory and change the facts – or
so German Chancellor Angela Merkel and other pro-austerity European
leaders appear to believe. Though facts keep staring them in the face,
they continue to deny reality.
Austerity
has failed. But its defenders are willing to claim victory on the basis
of the weakest possible evidence: the economy is no longer collapsing,
so austerity must be working! But if that is the benchmark, we could say
that jumping off a cliff is the best way to get down from a mountain;
after all, the descent has been stopped.
But
every downturn comes to an end. Success should not be measured by the
fact that recovery eventually occurs, but by how quickly it takes hold
and how extensive the damage caused by the slump.
Viewed
in these terms, austerity has been an utter and unmitigated disaster,
which has become increasingly apparent as European Union economies once
again face stagnation, if not a triple-dip recession, with unemployment persisting at record highs and per capita real (inflation-adjusted) GDP in
many countries remaining below pre-recession levels. In even the
best-performing economies, such as Germany, growth since the 2008 crisis
has been so slow that, in any other circumstance, it would be rated as
dismal.
Austerity has been an utter and
unmitigated disaster, which has become increasingly apparent as European
Union economies once again face stagnation.
The
most afflicted countries are in a depression. There is no other word to
describe an economy like that of Spain or Greece, where nearly one in
four people – and more than 50% of young people – cannot find work. To
say that the medicine is working because the unemployment rate has
decreased by a couple of percentage points, or because one can see a
glimmer of meager growth, is akin to a medieval barber saying that a
bloodletting is working, because the patient has not died yet.
Extrapolating
Europe’s modest growth from 1980 onwards, my calculations show that
output in the eurozone today is more than 15% below where it would have
been had the 2008 financial crisis not occurred, implying a loss of some
$1.6 trillion this year alone, and a cumulative loss of more than $6.5
trillion. Even more disturbing, the gap is widening, not closing (as one
would expect following a downturn, when growth is typically faster than normal as the economy makes up lost ground).
Simply
put, the long recession is lowering Europe’s potential growth. Young
people who should be accumulating skills are not. There is overwhelming
evidence that they face the prospect of significantly lower lifetime
income than if they had come of age in a period of full employment.
The European economy is still in major trouble and the policy direction is making matters worse, according to Joseph Stiglitz.
Meanwhile,
Germany is forcing other countries to follow policies that are
weakening their economies – and their democracies. When citizens
repeatedly vote for a change of policy – and few policies matter more to
citizens than those that affect their standard of living – but are told
that these matters are determined elsewhere or that they have no
choice, both democracy and faith in the European project suffer.
France
voted to change course three years ago. Instead, voters have been given
another dose of pro-business austerity. One of the longest-standing
propositions in economics is the balanced-budget multiplier – increasing
taxes and expenditures in tandem stimulates the economy. And if taxes
target the rich, and spending targets the poor, the multiplier can be
especially high. But France’s so-called socialist government is lowering
corporate taxes and cutting expenditures – a recipe almost guaranteed
to weaken the economy, but one that wins accolades from Germany.
The
hope is that lower corporate taxes will stimulate investment. This is
sheer nonsense. What is holding back investment (both in the United
States and Europe) is lack of demand, not high taxes. Indeed, given that
most investment is financed by debt, and that interest payments are
tax-deductible, the level of corporate taxation has little effect on
investment.
The hope is that lower
corporate taxes will stimulate investment. This is sheer nonsense. What
is holding back investment (both in the United States and Europe) is
lack of demand, not high taxes.
Likewise,
Italy is being encouraged to accelerate privatization. But Prime
Minister Matteo Renzi has the good sense to recognize that selling
national assets at fire-sale prices makes little sense. Long-run
considerations, not short-run financial exigencies, should determine
which activities occur in the private sector. The decision should be
based on where activities are carried out most efficiently, serving the
interests of most citizens the best.
Privatization
of pensions, for example, has proved costly in those countries that
have tried the experiment. America’s mostly private health-care system
is the least efficient in the world. These are hard questions, but it is
easy to show that selling state-owned assets at low prices is not a
good way to improve long-run financial strength.
All
of the suffering in Europe – inflicted in the service of a man-made
artifice, the euro – is even more tragic for being unnecessary. Though
the evidence that austerity is not working continues to mount, Germany
and the other hawks have doubled down on it, betting Europe’s future on a
long-discredited theory. Why provide economists with more facts to
prove the point?
