The Myth of European Austerity
When French President Nicolas Sarkozy was ousted by his socialist opponent Francois Hollande on May 6, the verdict from opinion leaders was swift and certain: France’s election results represented a sure repudiation of Europe’s strategy of government budget cutting to restore the economy.
But a closer look at how austerity has actually played out in Europe tells a much different story—and offers a lesson for American policymakers.
The austerity agenda, critics have it, in which debt-laden governments have slashed services and social programs, has angered European voters. Worse yet, the critics claim, it’s not working, as European nations that have followed this supposedly vicious austerity program are struggling with nonexistent growth and slipping back into recession.
And their solution is entirely predictable: austerity critics call for additional debt-fueled stimulus spending, despite the fact that trillions have already been spent to kick-start the European economy, to little effect.
However, it turns out that those blasting Europe’s experience with spending restraint omit some critical facts. Contrary to what you may have heard, spending cuts have largely been lacking in Europe’s economic crisis response. Instead, in most European nations, austerity has mostly taken the form of higher taxes. We shouldn’t be surprised Europe is struggling: when you raise taxes in a weak economy, it has a negative effect on investment and economic growth.