Austerity Didn't Work in Europe, and the U.S. Should Take Note


This past weekend, the people of France, Greece, Italy, and the UK came out in force against incumbent politicians, established right-wing parties, and the prevailing approach to euro zone recovery – austerity. The common voting pattern across the continent was a reaction to the palpable, negative effects of governments’ recent belt-tightening. The left-leaning outcome may end up not only saving the euro but also shifting the political discourse in the United States.

Since their inception in 2010, extreme austerity measures in Europe have been accompanied by slow to negative growth and worsening unemployment figures. Dramatic cuts to government spending, which for top euro zone countries averages 47% of GDP, has triggered layoffs, significantly less demand for goods and services, and shrinking economies. Consequently, governments are receiving lower tax revenues and budget deficits are also not recovering as planned. In Greece, the main target of austerity, 2011 brought a -6.9% change in GDP, 28.4% lower industrial output than 2005, and a 27% increase in corporate bankruptcies. Overall, euro zone GDP is projected to decline by 0.3% this year. Recent reports out of Britain have shown not only that the economy is experiencing a double-dip recession, but also that austerity is the main cause. In contrast, the U.S. economy has grown by an average of 3.7% quarter over quarter since the 2009 fiscal stimulus and subsequent rounds of monetary easing. In addition, U.S. unemployment has started a gradual decline from the peak in late 2009.

France’s election ushered in a new president, Francois Hollande, that campaigned as the growth-focused alternative to austerity. Hollande’s platform includes stimulus spending that would be offset by increasing taxes on the wealthiest people and corporations. His stimulus plan includes the hiring of 60,000 teachers, subsidized employment for entry-level workers, and the construction of over 500,000 homes per year. If projections hold, Hollande’s Socialist Party will achieve a parliamentary majority and the resulting freedom to enact change. In Greece, political parties that supported their country’s bailout and mandated austerity measures saw their parliamentary share drop from 74% to 32%. The second-place party will now seek an anti-austerity coalition and, if no agreement is reached, there will be a new round of elections this summer. The winners in Italy’s local elections were mostly center-left politicians running on the notion that the government is demanding too much sacrifice from the 99% and not enough from the 1%.

The election results in Greece, Italy, and Britain represent a clear referendum against the status quo and will buoy Hollande’s negotiations to add stimulus measures to the EU’s fiscal treaty. Many European leaders have already spoken out in favor of growth-based policy and the austerity champions (i.e. David Cameron and Angela Merkel) are looking more and more isolated. Hopefully, across the pond, the American public will recognize recent EU history as a test, failure, and rejection of the 2012 Republican platform; cut taxes for the wealthy and spend less on everybody else. Public consensus for a “now-and-later” strategy may help break the current stalemate in Washington. Now, implement a fair tax code and short-term spending for job creation/public-good investments. Later, after employment rises and GDP growth stabilizes, cut spending (particularly long-term entitlement spending) and balance the budget.