Reply To: Austerity has failed. An open letter from Piketty to Merkel

[Arcus]

This again? Let’s look at government spending as percentage of GDP from highs in 2009/10 to lows in 2013/14, retrieved from Eurostat:

-Ireland cut from 47.6% i 2009 to 39% in 2014. Down 8.6%
-Latvia cut from 44% i 2010 to 36% i 2013. Down 8%.
-Lithuania cut from 44.9% in 2009 to 34.9% in 2014. Down 10%(!)
-The UK cut from 49.7% in 2009 to 44.4% in 2014. Down 5.3%.

What’s the trend with these countries? They faced the cuts head on and are now growing at a more healthy rate.

And what about the laggards?
-Portugal cut from 51.8% in 2010 to 49% in 2014. Down 2.8%.
-Spain cut from 45.8% in 2010 via 47.3% in 2012 to 43.6% in 2014. Down 2.2%.
-Greece cut from 54% in 2009 via 60.1%(!) in 2009, and finally went down to 49.3% in 2013. Down 4.7%.

Now take a look at GDP growth rate. Notice the correlation between timing of cuts in government expenditure and growth?

While I am absolutely not denying that Keynesian fiscal counter-cyclical stimulus works, the point of it is to save in good years and spend in bad. However, if you don’t save in good years there is nothing to spend in bad years, and this is the lesson learned. Surprisingly, even some politicians on the left are starting to understand .