by Philipp Bagus
Many politicians and commentators such as Paul Krugman claim that Europe's problem is austerity, i.e.,
there is insufficient government spending. The common argument goes like this: Due to a reduction of government spending,
there is insufficient demand in the economy leading to unemployment. The
unemployment makes things even worse as aggregate demand falls even more,
causing a fall in government revenues and an increase in government deficits.
European governments pressured by Germany (which did not learn from the supposedly fateful
policies of Chancellor Heinrich Brüning) then reduce government spending
even further, lowering demand by laying off public employees and cutting back
on government transfers. This reduces demand even more in a never ending
downward spiral of misery. What can
be done to break out of the spiral? The answer given by commentators
is simply to end austerity, boost government spending and aggregate demand. Paul
Krugman even argues in favor for a preparation against an
alien invasion, which would
induce government to spend more. So the story goes. But is it true?
First of all, is there really austerity in the
eurozone? One would
think that a person is austere when she saves, i.e., if she spends less than
she earns. Well, there exists not one country in the eurozone that is austere.
They all spend more than they receive in revenues.
In fact, government deficits are extremely
high, at unsustainable levels, as can been seen in the following chart that
portrays government deficits in percentage of GDP. Note that the figures
for 2012 are what governments wish for.
The absolute figures of government deficits in
billion euros are even more impressive.