I found this graph in an article this morning by Brad DeLong, In Which I Go Around, Over and Over Again, in Circles as I Try to Understand What Is Going on in Europe. What is displayed in the graph is GDP for the European Union. You see that it grew very predictably from 2000 to 2008 and then the crisis hit and the recession started. But then the economy started to recover very consistently (although anemically) from 2009 to 2011. And then it just died.
Everyone understands the recession. But why, after a short period of recovery has the economy stagnated? In a word: austerity. It has somehow become God given knowledge that governments should raise taxes and cut spending. This will supposedly create a strong economy because… Well, the truth is that no one can really say anymore. They used to have the work of Alberto Alesina, but that’s been shown to have been wrong.
Also this morning, Paul Krugman quoted the German government spokesman Georg Streiter saying, “We continue to work for stronger growth and employment and our government still believes there is no contradiction between consolidation and growth.” By “consolidation” he means austerity. You would think that the graph above would prove that there most definitely is a contradiction. But don’t expect those in charge in Europe (especially in Germany) to admit that. As I say a lot around here: bad economies are great for the rich.
DeLong’s article included an extended quote from Eurointelligence, in which they talk about how German newspapers are obsessed with the French budget defict:
What’s going on in Europe now is one of the cases that students in the future will look back on and say, “What were they thinking?!” People will look at graphs like the one above and rightly wonder how those who were pushing for austerity could have missed such an obvious problem. Of course, the point is that those in power don’t care; they have bigger fish to fry. And the German papers aren’t publishing graphs like that or even talking about the issue. And when they do talk about bad economic times, German nationalism tends to rear its ugly head with the people thinking it is all about those morally bankrupt countries in the south who over-borrowed. (And who, exactly, were the bankers who over-lent? The Germans. Not that the bad economy has anything to do with such old “sins” at this point.)
DeLong presented another graph that looks at the change in 10-year bond rates compared to five years ago for the US and Germany. They are right in line with each other up to the beginning of 2013. But then they uncouple in a big way with the bond rate decrease in Germany over twice what it has been in the US. This is going in the opposite direct that it should be going. But it is a great opportunity for Germany: it could spend some money. But it is insisting on austerity all around. The idea is that all of Europe will save its way to prosperity. But that isn’t how it works.
The “tighten our belts” argument always sounds reasonable. But in a macroeconomic sense, it doesn’t work if everyone is cutting back at the same time because everyone’s expenditures is everyone’s income. So austerity only makes sense in the context of the already rich and what is good for them. Meanwhile, there is widespread suffering in Europe. And it will apparently only abate when the rest of the world is doing really well economically. That will allow Europe to recover via exports. But that could take ten years. And what’s really sad is that if and when that happens, the power elite will proclaim, “See! Austerity and growth are compatible!”