From the Wall Street Journal (!, albeit not the editorial page..)
Paper by EU Economist Backs Austerity’s Critics
Coordinated austerity in euro-area countries has stifled economic recovery and deepened the crisis across the currency bloc, according to a new technical paper prepared by an economist at the European Commission.
Spending cuts in Germany in particular have made things worse for the weaker members of the euro area through “spillovers” – the economic impact on economies connected to Germany’s– the paper says, adding that limited stimulus programs in richer countries could help the whole of the currency bloc.
The paper, which doesn’t necessarily represent the views of the powers-that-be at the Commission, presents some inconvenient conclusions for European authorities from one of their own economists. The European Union and national governments have come under fire from outside economists for pursuing austerity across the euro zone. These critics have argued that Germany in particular should be running bigger deficits to help drag the bloc’s weaker members out of their slumps.
The commission paper backs the critics. It claims that the effects of brutal cuts in the weaker euro-zone countries could have been mitigated if Germany and other core euro-zone nations had refrained from also cutting spending and raising taxes at the same time. “The symmetry of the fiscal adjustments in all euro area countries at the same time has hampered this adjustment, with negative spillovers of consolidations in Germany and other core euro area countries further aggravating growth in deficit countries,” the paper says.
“These negative spillovers have made adjustment in the periphery harder, and have further exacerbated the temporary worsening of debt-to-GDP ratios in programme and vulnerable countries,” it concludes.
Analyzing austerity between 2011 and 2013 in Greece, Italy, Spain, Portugal, Ireland, France and Germany and the rest of the euro area as one bloc, the paper finds that the impact of cuts in euro-area countries didn’t just hit the domestic economies but stalled an economic turnaround across the currency zone.
A link to the paper, entitled Fiscal Consolidation and Spillover Effects in Euro Area Countries, was tweeted out of the account of the commission’s economics and finance department, known as DG ECFIN, Monday. The tweet was later deleted and the paper was removed from DG ECFIN’s website.
A spokesman for the European Commission said the upload of the document was an accident and the research document is not yet ready for publication. Another commission official said the paper would be published, with no significant changes, shortly.
[UPDATE: The paper has now been published.]
The document was downloaded by several people Monday following the errant tweet, and was first reported by Greek daily, Kathimerini [in Greek].
As in all economic-analysis papers from commission staff, this too carries the disclaimer that its finding represent the views of its author, not those of the European Commission.
The author of the document, Jan in ‘t Veld, said in an email that he couldn’t comment on his findings because the research hadn’t been published yet.
The paper briefly published Monday shows that overall fiscal multipliers in the euro area–how much in economic output is lost for every euro withdrawn from the economy either through raising taxes or cutting public spending–are between 0.5 and 1, depending on how open the economy in question is. Officials of the EU and International Monetary Fund have previously assumed a multiplier of around 0.3.
The question of fiscal multipliers led to a heated debate over the last year. IMF chief economist Olivier Blanchard, in a paper published September 2012, argued that too-low fiscal multipliers had been used in the design of Europe’s bailout programs, leading to sometimes gross underestimation of the effects of austerity.
The commission paper goes into further detail, assessing the impact of austerity through spending cuts versus austerity through higher government revenue. In the case of Spain, for example, the new draft research shows that for every euro in spending cuts, 1.1 euros were lost in the economy. The impact of reducing the government’s deficit through raising more revenue would have taken 0.5 euros out of the economy for every euro in revenue.
The finding can be interpreted as a rejection of the brand of austerity widely implemented in the European periphery, which has focused on spending cuts rather than boosting revenues. The commission has repeatedly recommended that troubled countries like Greece focus more on cutting spending rather than raising revenue through higher tax rates.
The European Commission has more recently also recommended slowing down on fiscal consolidation for several countries in the euro area.
As experts at DG ECFIN prepare to assess national budgets for 2014, the commission has encouraged stimulus programs for countries that have the budget leeway for it, especially in the form of job-creating public investments.
The draft research paper notes that, despite the severe shock of austerity since 2011, the efforts to rationalize public finances will bear fruit from 2014 onwards “by when expectations of lower debt and lower future taxes generate positive confidence effects that lead to a recovery.”
