Austerity: It’s About Time

A discussion rages with regard to the austerity measures implemented by European countries. Paul Krugman, a notable opponent of austerity measures, even refers to it as “Europe’s Austerity Madness“. If one believes Krugman’s and some other populistic outbursts, one might actually believe that governments did not take on addional debt in past years. But the graph below tells you an entirely different story, I hope!

Government consolidated gross debt as a % of GDP. Data is retrieved from Eurostat.

Government consolidated gross debt as a % of GDP. Data is retrieved from Eurostat.

It is clearly visible that governments have already taken up additional and massive amounts of debt, up to the point that questions are raised about the financial sustainability of goverment debt. It is not entirely clear what the maximum amount of debt to GDP is before the debt turns unsustainable. A lot depends on what the market seems to think of it. But it is better to stop this rising trend sooner rather than later, before the market can indeed decide that it is unsustainable – a very hazardous situation.

There are a few ways to decrease the debt to GDP ratio. Most are relatively “easy and blurry”, in that it is not really clear who pays the bill. One way is inflation; a central bank can print money to pay for a country’s debt. This way, the bill goes to everyone who holds money, because its value will be reduced – “inflation”. Another way is to increase taxes. This way, the government deficit can be reduced, and perhaps even turned into a surplus, in order to reduce the government debt. A third way, abundantly used in previous decades, is to assume and strive for economic growth. If the denominator (GDP) grows significantly and steadily enough, deficits and debts can run quite high while still not being perceived as being unsustainable.

The particular structure of the Eurozone and its institutional framework make that printing money is not (yet) an option. Increasing taxes significant enough to halt the developments of the graph above is infeasible, given that the fiscal pressure is already very high. Lastly, of course, achieving economic growth is a desirable goal, but while governments are frantically aiming for it, prospects remain grim.

Governments  have refrained from doing so as long as they could (again, see the graph), but they have to cut back on their spending (i.e. implementing austerity measures) at some point. And you know what? It’s about time. Governments have tried maximally to let unidentified persons foot the bill (future generations in the case of government debt and general tax-payers in the case of increasing taxes).

There is one, major upside of implementing austerity measures: it is highly visible. This may lead to painful situations, but the visibility of austerity measures facilitates democratic discussion. Why cut back on education, and not on health care – or the other way around? Why depress poorer families more than richer ones – or vice versa? It fuels a fundamental discussion about what it is just and what is right, whereas the easy and blurry solutions refrain from finding righteousness at all – they just take the easy way out.

2 comments on “Austerity: It’s About Time

  1. […] not convinced by his case for significantly increasing government spending. In a general sense, as I have argued before and in a true Dutch calvinist tradition, some austerity every now and then may be healthy, not in […]

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