“How well did this panic-induced austerity work?”
“Some will say that this is the price that has to be paid for restoring budgetary orthodoxy. But is this so?”
Those are the questions asked by Paul De Grauwe andYuemei Ji in Panic-driven austerity in the Eurozone and its implications. (Quotes to follow)
We provide some answers in Figures 4 and 5. Figure 4 shows the relation between the austerity measures introduced in 2011 and the growth of GDP over 2011-12. We find a strong negative correlation. Countries that imposed the strongest austerity measures also experienced the strongest declines in their GDP. This result is in line with the IMF’s recent analysis (IMF 2012).
Figure 5 may lead us to doubt this. It shows the austerity measures and the subsequent change in the debt-to-GDP ratios. It is striking to find a strong positive correlation. The more intense the austerity, the larger is the subsequent increase in the debt-to-GDP ratios. This is not really surprising, as we have learned from the previous figure, that those countries that applied the strongest austerity also saw their GDP (the denominator in the debt ratio) decline most forcefully. Thus, it can be concluded that the sharp austerity measures that were imposed by market and policymakers’ panic not only produced deep recessions in the countries that were exposed to the medicine, but also that up to now this medicine did not work. In fact it led to even higher debt-to-GDP ratios, and undermined the capacity of these countries to continue to service the debt. Thus the liquidity crisis that started all this, risks degenerating into a solvency crisis.
Chosen excerpts by Job Market Monitor from