the problem with europe ’ s austerity debate
DESCRIPTION
The Problem with Europe ’ s Austerity Debate. Anders Åslund Senior Fellow Cato Institute June 5, 2013. What Is Austerity?. Fiscal responsibility! = Money is not free The real questions: 1. Fiscal responsibility: N ow or later? 2. Who is prepared to pay? 3. To frontload or backload?. - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/1.jpg)
The Problem with Europe’s Austerity Debate
Anders ÅslundSenior Fellow
Cato InstituteJune 5, 2013 1
![Page 2: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/2.jpg)
2
![Page 3: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/3.jpg)
What Is Austerity?• Fiscal responsibility! = Money is not
free
• The real questions:
1. Fiscal responsibility: Now or later?
2. Who is prepared to pay?
3. To frontload or backload?3
![Page 4: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/4.jpg)
Six Reasons why early fiscal adjustment preferable
1.1. Early return to growthEarly return to growth2.2. Politically easierPolitically easier3.3. Better fiscal adjustment Better fiscal adjustment 4.4. More structural reformMore structural reform5.5. Financial sustainabilityFinancial sustainability6.6. Earlier restoration of confidence Earlier restoration of confidence
4
![Page 5: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/5.jpg)
1. Early Return to Growth & Higher Growth Trajectory
5
![Page 6: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/6.jpg)
2. Politically EasierRahm Emmanuel: “A crisis is a terrible thing to waste.”•Latvia: One riot in January 2009. PM Valdis Dombrovskis – reelected twice & longest serving PM in Latvia: “In this situation we have only two alternatives – one bad and a worse one. I prefer the bad one.”•Greece: years of riots, strikes & demonstrations; radicalization of electorate; is democracy in danger?
6
![Page 7: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/7.jpg)
3. Better Fiscal Adjustment: Get ahead of the curve!
• Latvia 2/3 expenditure cuts, 1/3 tax hikes
• Greece: Little decline in public expenditures, lingering around 54% of GDP – GDP falls faster than expenditure cuts…
• Greece: Little prospect for growth 7
![Page 8: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/8.jpg)
Latvia: Public Expenditure as % of GDP Normalizing
8
![Page 9: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/9.jpg)
Latvia Brought Down Budget Deficit, Greece Stuck at Huge Deficit
9
![Page 10: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/10.jpg)
4. More Structural ReformsExpenditure cuts drive growth
•Vested interest are not mobilized early on
•More deregulation
•More public sector reform – Latvia sacked 30% of civil servants instantly – Greece just starting
10
![Page 11: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/11.jpg)
Latvia: Sharply Falling Real Unit Labor Cost, 20%, 2008-12, Greece Less
11
![Page 12: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/12.jpg)
5. Financial Sustainability Vital
• Public debt in euro area on average Public debt in euro area on average 91% of GDP, end 201291% of GDP, end 2012
• Nine of 27 EU countries have lost Nine of 27 EU countries have lost market access and needed market access and needed assistanceassistance
• Financial assistance limitedFinancial assistance limited
• If no financing, little choiceIf no financing, little choice12
![Page 13: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/13.jpg)
6. Confidence Restored Early• In Latvia bond yields peaked in June
2009 but in February 2012 in Greece
• Much lower yields and market interest rates in Latvia
• More domestic and foreign investment
13
![Page 14: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/14.jpg)
Greatest Mistake:Greece May 2010 Program
• Too large credits given caused default
• No structural reforms• No reduction of public expenditures as %GDP
• Too small fiscal adjustment• No confidence & no growth 14
![Page 15: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/15.jpg)
Focus on Education!The key problem of Southern Europe:
•Little education
•Education of poor quality
Only 38% of the Portuguese labor force has graduated from high school (US: 88%)
15
![Page 16: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/16.jpg)
Share of Labor Force That Has Graduated from High School, 2012
16
![Page 17: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/17.jpg)
Performance on PISA Math Test, 2009
17
![Page 18: The Problem with Europe ’ s Austerity Debate](https://reader036.vdocuments.us/reader036/viewer/2022062516/56812a8a550346895d8e2de8/html5/thumbnails/18.jpg)
Conclusions• Europe’s fiscally conservative north thrives:
Latvia’s GDP growth 5.5% in 2011 and 2012
• The backloaded South suffers: Meanwhile Greece GDP fell about 6% each year
• IMF advice seriously flawed
• Overestimated fiscal space in Spain, Cyprus & Slovenia
• Intentionally delays crisis resolution in the South 18