Dawn Holland and Jonathan Portes present the results of their macro-econometric model of the EU in this Vox column. Specifically they argue that because of the times we live in, large scale and largely uncoordinated fiscal consolidations across the EU will lead to a collective fall in GDP and an increase in debt to GDP ratios. The increase in debt is obviously the opposite of what was intended.
The figure below shows their scenarios.
Scenario 1 is a fiscal consolidation with a working financial system, scenario 2 models a constrained financial system and so is a bit closer to reality.
Meanwhile, this paper just published in the Economic Journal (unpaygated .pdf here) tells essentially the same story using a New Keynesian model with all the bells and whistles.
30 replies on “Self Defeating Austerity? Not in Ireland, Apparently”
Private Eye say it best
“The IMF has warned that the austerity cuts it said were essential to escape economic meltdown have caused an economic meltdown. “Having studied the effects of 2 years of austerity we now conclude that austerity leads to austerity in the countries that implement it”, said an IMF spokesman.
Downgrading its growth forecasts from “abandon all hope ye who enter here” to “bring out your dead” the IMF said that more austerity measures would be needed to combat the austerity measures that have led to austerity throughout the region.
“It’s only through a fresh round of austerity that Britian and Europe can hope to escape from the misery caused by the first round of austerity””
No Bank debt deal until 2013.
http://www.merrionstreet.ie/index.php/2012/11/taoiseach-to-meet-chancellor-merkel-in-berlin-today/?cat=3
‘Current policy looks less like optimal coordination – and more like a suicide pact.’ (Holland & Portes)
Thanks Stephen – this is most interesting. [h/t fiatluxjnr]
@all
Why Ireland ‘special’? High Deficit? GDP/GNP duality? Unique Paddy Multipliers? Creative National Accounting? Other?
@Richard Portes
How about a guest post on this blog? Very welcome
@Seafoid
It reminds of the physician in that wonderful film, ‘The Madness of King George’; the physician who insisted that the colour of the stool held the key to determining the health or otherwise of the King.
The physician was removed in the end, and the king survived, just about.
@ David O’Donnell
I’d have to look at the model, but it might be this…
A weak Eurozone leads to a weak Euro. This would help our exports relative to US and Britain. Maybe.
If I am reading the graph correctly it suggests that the Debt/GDP ratio is only reduced by 2.5%, which must surely be within the margin of error. A lot of pain for negligible gain.
@Rory O’Farrell
Maybe – but Euro has held up well enough …. and EZ could live with 1.25 or even 1.20 [if a big bazooka from ECB …]
Be neat to see their model rerun with Irish GNP. Worth a request?
On Production – high skill & high value added – where we need focus if we ever recover from dead property fetish ….
NCB: Manufacturing output continues to push ahead
INCREASING orders and output led to an eight straight month of improved performance in the State’s manufacturing sector in October.
The NCB Purchasing Managers’ Index rose from 51.8 to 52.1 during the month. Anything above the 50 mark separate expansion from contraction.
“A solid expansion of manufacturing output was recorded in October,” NCB said.
“Production rose for the sixth successive month, and the latest increase was the fastest since June.”
http://www.independent.ie/business/irish/ncb-manufacturing-output-continues-to-push-ahead-3279745.html [acknowledging M Hennigan’s qualifiers]
Jeremy (anti_euro) Warner in the Telegraph …
You need to be a little bit careful with these findings, which are somewhat self-serving. Under Jonathan Portes, the National Institute has positioned itself very much on the stimulus side of the austerity-versus-stimulus debate. This is a paper that sets out to prove that the poor growth performance of most EU countries, including the UK, is primarily down to fiscal austerity.
Nonetheless, the number crunching seems to be robust enough, and it’s hard to disagree with the paper’s central finding that fiscal multipliers are much larger than in more normal times when consolidation is conducted collectively and into conditions of an already depressed economy.
Even so, the paper suffers from one, rather glaring, omission. Whether you are on the big or small state side of the argument, there is no doubt that fiscal consolidation is urgently needed in much of the eurozone periphery, and some parts of the core as well.
http://www.telegraph.co.uk/finance/comment/jeremy-warner/9647248/The-euro-is-heading-for-a-permanent-state-of-depression.html
@Stephen Kinsella
The Vox paper is frightening.
If the GDP (Scenario 2) simulations are borne out for 2013, Europe is heading for a nightmare scenario.
Is the increase in debt “the opposite” of what is intended. I very much doubt so. Any economist who is not simultaneously a german taxpayer will tell you if you reduce your GDP by say 2% with austerity, in the absence of any simultaneous stimulus measures, you will imediately increase your debt/GDP ratio by 2%. It is hardly rocket science.
The ECB and EMF were approaching the problem to reduce the deficit, a completely different equation. By default reducing the deficit will increase debt/GDP ratio although if the deficit is big enough deficit reduction can decrease the rate of growth of this ratio. However it cannot reduce this ratio as this the economic equivalent of trying to push a car up the hill will a piece of string
debt/DGP ratios of 100% plus are sustainable if the debt is mainly owned by domestic entities such as pension funds, savers and companies then the interest transfer is internal in the country from the government to savers and this can be rectified by increased taxation to rebalance the equation.
In Irelands case we only got the last tiny spurt of growth because of the problems Greece and others created. This led to a reduction in the euro and an increase in exports.
It wasn’t by being good boys whatever Noonan may think.
Belgium is about to start on budget cuts The ECB doesn’t have employment in its mandate either.
@ Seafoid
it does have economic growth and financial stability in there though. ECB policies 2008-2011 were somewhat lacking in that regard.
It appears that for whatever reason, Ireland is now running a current account surplus now (weaker Euro, lower consumption of imports from other Eurozone countries, or probably a combination of the two). http://www.tradingeconomics.com/ireland/current-account
Of course, currency depreciation/current account surplus is one of the ways under Keynesian policy to improve an economy after a crisis. Ireland two biggest trading partners are both non-Euro countries (U.S. and U.K.), so, like Germany, they benefit from the weak Euro. http://www.nationsencyclopedia.com/Europe/Ireland-FOREIGN-TRADE.html
@ BEB
The Fed has a more balanced mandate IMO
Catalonia has 22% unemployment. Greece has over 25%. Ireland is stuck on 14.6% and will be for the foreseeable.
@Greeks who pay taxes – in solidarity
Average Greeks are reeling under the strict austerity measures passed in order to balance the country’s budget. Top earners, on the other hand, continue to evade the tax man. Most of the self-employed in Greece significantly underreport their earnings, whereas shipping magnates enjoy generous exemptions.
…
At the same time, though, a small elite of wealthy Greek ship owners is fighting to defend its tax-free status — also, ironically enough, enshrined in the constitution. Meanwhile, other moneyed Greeks, including doctors, lawyers and engineers, continue to systematically avoid taxes. According to a recent study, seven out of 10 self employed Greeks significantly underreport their earnings. Indeed, though the crisis has been raging for five years now, many wealthy Greeks are under no more pressure to pay taxes than they were before.
http://www.spiegel.de/international/europe/wealthy-greeks-still-dodging-taxes-despite-crisis-a-864703.html
& the editor who published the Largarde list of 2000 was arrested (linked on earlier thread).
Greece badly needs a REVENUE. Ours ain’t bad …
Portugal approves austerity budget
The new tax hikes would hit Portugal’s cash-strapped population in every area
http://www.independent.co.uk/news/world/europe/portugal-approves-austerity-budget-8269976.html
@John McHale
Pls Correct the Title here: It is HOLLAND & Portes
@all
Jonathan Portes has replied to my email and will comment after he chats with Dawn Holland.
@ Stephen
pls delete my 9.51 blog time – wrong thread ..
Yanis Varoufakis seems to be plumbing the depths of depression. It took a long string of too little too late rescues to bring down what used to be a courageous and enthusiastic man.
http://www.nakedcapitalism.com/2012/11/yanis-varoufakis-the-return-to-growth-should-not-come-at-any-price.html
@ DoD
I had a read of your indie Portugal link. It’s very interesting to compare the attention to detail of different newspapers. I would have expected an article on tax rises to mention which taxes were impacted.
Austerity eats her young. I see this morning that manufacturing activity has declined for the eighth month in Germany and for all but one of the last fifteen months in France.
Too little too late is biting the core where they will feel it the most. Soon it will be difficult to differentiate the periphery from the core. Unfortunately there is little comfort for us there.
The authors reveal that austerity will result in higher debt-to-GDP compared to today, but do not reveal what might occur under an alternative fiscal-expansionary scenario. Consider the possibility that while austerity leads in these examples to higher debt-to-GDP, fiscal expansion will have precisely the same effect since the days of “growing our way out of debt” are long behind us.
The liklihood is that the authorities will swing from austerity to stimulus and back again for several years, while in the background intensifying their efforts to nullify the effect of 3 decades of malinvestment by simply printing money.
@Mickey Hickey
It didn’t take long to hit the core.
@Mickey Hickey
The Eurozone’s Combined Manufacturing PMI Fell To 45.4 Clusterstock. Germany sucked too
[prob with link on nakedcapitalism today …]
@seafoid
had a link a while back to the detail ….. it is really savage and Portugal cannot take much more …. smart young ones are heading for Angola ….
Euro zone manufacturing shrank for the 15th month running in October as output and new orders fell, a survey showed today, fuelling expectations of further easing from the European Central Bank.
… Markit’s Eurozone Manufacturing Purchasing Managers’ Index (PMI) fell to 45.4 in October from September’s 46.1. The October figure was just up from an earlier reported flash reading of 45.3. The index has been below the 50 mark that divides growth from contraction since August 2011.
The manufacturers’ output index sank to 45.0 from 45.9.
Earlier data from Germany showed its manufacturing sector shrank for the eighth month and French figures showed a decline in all but one of the last 15 months.
In Spain, likely to become the next country to be bailed out by the European Union, the pace of decline accelerated. The picture was similar in Italy.
Data due on Tuesday is expected to show the bloc’s dominant service sector has contracted for all but one of the last 14 months.
http://www.irishtimes.com/newspaper/breaking/2012/1102/breaking31.html
Ireland was the only one of the 17 countries using the euro seeing growth.
@ seafóid: ” Ireland is stuck on 14.6% and will be for the foreseeable.”
Plus the Immigrated Ones and the Uncountable and I guess its nearer to 20%. And I would like to see the county stats (and urban v rural). Sectoral? Age? Gender? Averages conceal more than they reveal.
I thought that G*Ps were totally invalid and discredited metrics. So why are they still being used? The damn things merely measure ‘activity’ (as in churning).
Its investment in productive capital that we need (via personal savings). But real savings (not debt repayments) reduce consumption and that netts out at less consumption taxes.
So where is this ‘growth’ then? Is the Neo-economic Math 2 – 2 > 0?
@ DoD
Portugal may go the way of Greece which has already gone to Level K where the police are infiltrated by the fascists who arise after Level J of austerity.
Health and Social problems are worse in more unequeal countries. Note USA upper right off the chart and Japan at lower left. Do we want to throw our lot in with the UK or the well governed EZ countries placed lower and to the left?
http://www.nakedcapitalism.com/2012/11/desperate-effort-by-tyler-cowen-and-megan-mcardle-to-silence-discussion-about-income-inequality.html
@ MH: Inequality: Here be real dragons. Inequality in what? How? Where? Whom? Pay or income? Wealth? Its as long as that piece of string.
Soundbites are heeded in front of empirical evidence (which takes some time to get your head around).
We do have inequalities – and yes they do matter – a little in some cases, a lot in others. It depends.
@BWS
It starts with pay, spreads to income and carries on to wealth. Then it shows up in gated communities, twelve foot walls topped with barbed wire and broken glass, a couple of Dobermans or Alsatians. Schools separated by income. Universities for the middle class and the poor. Oligopolies and monopolies abound aided and abetted by a Gov’t bought and paid for by Plutocrats.
There is little visible evidence of wide disparity in Europe outside the UK. The US has become increasingly like Latin America used to be, edging closer to modern feudalism. I spent a lot of time in countries with wide pay/income/wealth disparities. Even when armed the anxiety level was above normal. Give me Communist or Socialist states which have fewer desperate people and where the vast majority of people die in bed of old age.
@ MH: Nifty commentary. Esp the bit about ‘communist’ states and flatter levels of inequality. Cuba? Nah! Not possible! But the data suggests otherwise.
When the truth is confirmed – trash the truth! If that fails, thrash the messenger. We seem to be jolly good at that.
“Now where is my AK 47? Must call that Lord of War chap? Need plenty of ammo.”
They all need food and water. Food is tricky (needs cooking). Water is fiendish (needs to be potable). And that is before you decide to practice some procreation! Its amusing – in a very sad fashion.