Last month, the Greek parliament backed a 1,500-page bill that included a series of further fiscal belt-tightening measures needed to please the country’s European creditors, clearing the way for a further several billion euros in bailout loans. This, of course, has been a recurrent story since 2010, when Greece signed its first of three bailout agreements, resulting in massive spending cuts.
But, according to a new study published by the Center for European Economic Research, there’s one area in particular where government spending cuts prove to be economically self-defeating: Research and development (R&D).
The study, which analyzed how economic crises affect government-financed R&D in 26 OECD countries, found that different approaches to state R&D spending during times of economic crisis are helping to drive an “innovation gap” between states.
After the global financial crisis hit in 2008, Germany increased R&D funding.
So-called “moderate innovators” like Greece, Italy, Hungary and Spain, the study finds, reacted to downturns with a “pro-cyclical” approach: Meaning they cut R&D spending to save money. Meanwhile, European “innovation leaders” like Germany and Sweden have done the exact opposite: They’ve boosted R&D funding during downturns.
The different approaches (albeit in cases like Greece, not purely of its own government’s volition) have a clear and lasting effect on productivity, according to the study. Those countries that invest more in R&D during downturns emerge from crises in strengthened competitive positions. The resulting innovation gap grows with every subsequent crisis, perpetuating the imbalances within Europe.
After the global financial crisis hit in 2008, for example, Germany increased R&D funding for small and medium-sized enterprises and for e-mobility projects. Moreover, a program to fund research programs in the east of Germany was expanded to include the entire country.
Such spending policies during tough economic times make a lot of sense, according to Georg Licht, one of the study’s authors; that is often the case even if it means taking on more sovereign debt, since there are numerous examples in Europe where the rate of return resulting from R&D funding exceeds the interest rate a government would have to pay on that borrowed money. “For governments, it would therefore be advisable, particularly in times of low interest rates, to take on debt in order to finance higher R&D spending,” said Mr. Licht.
Of course, in highly indebted countries, that is not always easy. And in Greece’s case, taking on more debt to boost R&D spending would require convincing its European creditors first.
A version of this article appeared in the business weekly WirtschaftsWoche, a sister publication of Handelsblatt Global. To contact the author: email@example.com