The proponents of Keynesian-style deficit spending argue against austerity by claiming that it has failed in Europe. They point to the U.K., Italy, Greece, and onward, shouting that European government spending cuts have led to slow or negative growth and sky-high unemployment rates. The only problem with these arguments is that all the purported facts are misstated.
In reality, very few countries in Europe have actually reduced government spending. There have been riots in protest of proposed or imagined cuts in spending, but not much actual cutting. For those who have reduced government spending, the results have been better than the conditions experienced in the countries that have continued to expand government spending.
If we actually look at the data, rather than simply making unsupported claims, a completely different picture emerges.
The data on relative GDP growth show that
only two of the eight countries that practiced austerity performed worse than the average. Those two countries are Iceland and Ireland. Iceland had a complete meltdown of their banking system, so it is clearly a special case. Ireland had a big real estate bubble that popped, which helped cause a bank crisis, and an enormous government deficit. It was definitely one of the countries in big financial trouble.
While two of the eight countries that have tried austerity had GDP growth that was worse than the EU average from 2008 to 2011,
that still leaves six of the eight that performed better than average. Further, the two countries with the best relative performance in all of Europe, Poland and Lithuania,
are both in the austerity group along with Bulgaria with the fourth best relative GDP growth.
Thus, this data suggests
that for most of the European countries that have tried austerity, it has worked.
The lesson from this column is that austerity can indeed work if a country is willing to try it. Trying austerity means actually cutting government spending, not just spending less than the government or liberals want. Also, before people claim a policy has failed they should make sure that the examples of the supposed policy failure actually applied the policy in question.