Analyzing the European Austerity Argument

Veronique de Rugy started the uproar when she wrote this article, Fiscal Austerity in Europe Doesn’t Mean Large Spending Cuts. The graph everyone is linking to is:

This article evidently rubbed the folks at The Economist the wrong way and they piped in with this analysis.

Progress through last year is quite striking, given that the crisis only began in earnest in 2010. It has occurred despite truly pitiful growth (and ongoing recession in Greece). And there is more to come.

But what of the complaint that this is all due to tax increases, which don’t count, for some reason? That, too, is mistaken:

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For a person who has looked at a lot of graphs and tables in my life, the Economist analysis and graph is odd. I am not sure what these stacked bars, percentages, and projected expenses are supposed to tell me about austerity. Is that the total change in government spending since 2009? What does 2011-2013 projected spending have to do with spending over the last two years? So I downloaded the OECD data, reproduced Ms. de Rugy’s charts, and noticed this tidbit. If 2009 is the baseline then the Economist chart for Germany must be wrong. The OECD government final consumption data for Germany was $591.4 billion in 2009 and $630.1 billion in 2011 at current prices and current PPPs. Obviously this means that Germany increased their spending rather than reduced it. A similar argument can be made for France. Although the 2011 data was not available for France, it is unlikely France’s 2011 data will be below their 2009 number.

If we can agree that the OECD government final consumption data is a valid measure of austerity since it measures government spending and incorporates changes in purchasing power, then we can conclude that austerity is probably occurring in all of the countries in the graph except Germany and France.  The overall level of reduced spending in these “austerity”¬Ěcountries(excluding Greece) is less than -3%. It is interesting to note that only Greece and Ireland are spending less than they did 2008 while most of the countries are well above their 2008 levels. Austerity seems to be defined as slightly less spending than you spent in 2009 but higher than what you spent in 2008. Since most of the countries listed in the chart are spending at 2008 levels or higher, I agree with Ms. de Rugy that the European austerity except for Greece has not meant large spending cuts. Austerity has not occurred in Germany and France and has been pretty mild in the rest of the “austerity”¬Ě countries.