The Wall Street Journal

European Central Bank Economists Find That Austerity Works
The Wall Street Journal

A new paper published by European Central Bank economists argues that it is generally a good idea for countries that need to enact budget cuts and slash fiscal outlays to get it done quickly, as this can reduce the total fiscal pain and stabilize debt more quickly.

“Simulations using plausible assumptions suggest that frontloading consolidation reduces the total consolidation effort and stabilises the debt ratio more quickly, although it does imply larger short-term reductions in output,” write the authors in a paper.

The paper looks at the impact of fiscal consolidation on a country’s output, or what economists call the “fiscal multiplier.” The authors conclude that “even in the presence of a large fiscal multiplier, fiscal consolidation could initially lead to a higher debt ratio, but this effect will typically be reversed within a few years.”

The ECB paper will probably be well received in those eurozone capitals that have “done their homework” (as the Germans like to say) and sharply cut spending in crisis years but are now starting to see their economies return to growth. And it echoes other research the ECB has published backing Europe’s austerity approach.

The Baltic States, as well as Ireland and Spain have worked hard throughout the crisis to cut their deficit levels. For example, Lithuania posted a government deficit of 9.1% of GDP at the peak of the crisis in 2009. In that year, the country’s GDP fell by nearly 15%, but it has grown steadily since then.

L’austérité fonctionne, in your face les cabochons de la gogauche !