Fiscal Focus

Austerity Is Working!

German chancellor Angela Merkel leaves after a joint press conference with Vice Chancellor Sigmar Gabriel after a meeting of the coalition committee about refugees in Europe, Berlin, Germany, Monday, Sept. 7, 2015. Merkel, reflecting on "a moving, in some parts breathtaking weekend behind us," said Monday that all EU countries could help to accommodate the human tide from the Middle East and Africa. (AP Photo/Michael Sohn)
German chancellor Angela Merkel has been blamed for pushing through austerity. But it seems to be working.
  • Why it matters

    Why it matters

    The author argues that controversial austerity programs are in fact working in Europe, and that the European Union as a whole is better off today than it was a decade ago.

  • Facts

    Facts

    • European Union GDP increased by 20 percent in the last 10 years, while GDP per capita rose by 17 percent.
    • Unemployment remains high in a handful of countries, including Greece and Spain, where it is above 20 percent.
    • With the exception of Greece, government spending increased in all E.U. countries from 2006 to 2014.
  • Audio

    Audio

  • Pdf

The prevailing narrative in the debate over the situation in the European Union is that a relentless austerity program dictated by Berlin and executed by Brussels is economically subjugating the Continent and preventing national governments from helping the poor and the unemployed, and stimulating the economy.

German Economics Minister Sigmar Gabriel is calling for an end to the austerity regime and a “detoxification” of Europe. Sahra Wagenknecht, the parliamentary leader of the Left Party, wants to see an “end to the austerity mandate,” a “social new beginning” for the European Union and a “massive anti-crisis program” funded by the European Central Bank.

But an unbiased look at the database of Eurostat, the E.U. statistics agency, brings figures to light that are completely at odds with the doom and gloom scenarios of politicians, mostly on the left, and with the perceptions of many people.

In fact, the numbers show that the European Union as an economic bloc – still including Great Britain – is on the right track to overcoming the global financial and economic crisis, and the euro debt crisis. They also show that the economic problems are more of a structural nature than a consequence of a lack of government demand, and that they only affect a few, albeit important, European Union countries.

In the last 10 years, the gross domestic product, or GDP, of the European Union has increased by a total of 20 percent, to €14.6 trillion ($16.11 trillion). GDP per capita rose at only a slightly lower rate of 17 percent, to €28,700. When compared with a 30-percent GDP increase in the United States in the same period, this is no overwhelming result, but neither is it catastrophic.

The unemployment rate increased from 8.2 to 9.4 percent in the same period. It rose in 15 E.U. countries, remained virtually unchanged in eight countries and declined in five. At the same time, however, the working population in the E.U. has increased by about 6 million, to 227 million. This is attributable to stronger female participation in the workforce.

The average net incomes of E.U. citizens increased by 24 percent from 2006 to 2014.

In 16 E.U. countries, more people are employed today than 10 years ago. The problems in the European labor market are concentrated in a few nations, most notably Greece and Spain, where the unemployment rate is still above 20 percent.

Even youth unemployment is generally declining in the European Union. In the E.U. as a whole, the share of young people between the ages of 15 and 24 who neither have a job nor are in education or a job training program declined slightly in the last decade, from 12.7 to 12 percent. This percentage increased in 15 E.U. countries and declined in 13 countries. However, it is very high in Greece, Italy and Spain, as well as in Bulgaria and Croatia. A handful of countries are faced with the problem of raising a “lost generation,” but this is certainly not true of Europe as a whole.

On the subject of social injustice and poverty, the average net incomes of E.U. citizens increased by 24 percent from 2006 to 2014 – at a higher rate than the increase in GDP. In the same period, the number of people at risk of falling into poverty increased by 5 percent. There was also a slight increase in inequality. In this period, the lower 40 percent of income earners’ share of E.U.-wide net income declined slightly, from 21.6 to 20.9 percent, while that of the upper 40 percent grew from 60.8 to 61.6 percent.

The middle 20 percent earn 17.5 percent of total net income, a figure that has remained unchanged. In other words, while there is greater inequality in the European Union than there was 10 years ago, this is by no means a dramatic development.

Government spending throughout the E.U. increased by 21 percent from 2006 to 2014, to €6.73 trillion – at a somewhat higher rate than the increase in GDP. It was up in all countries except Greece, where government spending declined by 9 percent.

Belgium, which is deeply in debt, increased its government spending by 40 percent without any objections from the E.U. Commission. Government spending grew by 26 percent in France, and by 20 percent in crisis-ridden Ireland and Spain. These numbers are not exactly evidence of a brutal austerity mandate.

This fact check is by no means meant to relativize the fact that particularly the Greeks, Spaniards, Irish, Portuguese and Cypriots experienced and continue to experience tough times. However, it does show that Europe’s problems are concentrated in individual countries and regions, which is why they require specific responses. At a time when reforms are beginning to take effect, and the economy in crisis-ridden countries is slowly recovering, it would be utterly wrong to throw all fiscal rules overboard and launch massive, debt-financed economic stimulus programs throughout the European Union.

Most of all, Europeans should stop denigrating their European Single Market, one of the world’s three largest economic blocs, among international investors. In doing so, they are merely playing into the hands of populists who seek to destroy the European Union.

 

11 p12 The E.U. Economy-01

 

The author is a managing partner of the Handelsblatt Research Institute. To contact him: heilmann@handelsblatt.com

 

 

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