Monday, April 23, 2012

How's That Austerity Working?

Bloomberg details:

The debt of the euro region rose last year to the highest since the start of the single currency as governments increased borrowing to plug budget deficits and fund bailouts of fellow nations crippled by the fiscal crisis.
The debt of the 17 euro nations climbed to 87.2 percent of gross domestic product in 2011 from 85.3 percent the previous year, official European Union figures showed today. That’s the highest since the euro was introduced in 1999. Greece topped the list with debt at 165.3 percent of GDP, while Estonia had the least at 6 percent of GDP.
Bloomberg continues...
Italy ended last year with the second-highest debt at 120.1 percent of GDP. Spain’s rose to 68.5 percent from 61.2 percent. Germany posted one of the only declines, with its debt shrinking to 81.2 percent from 83 percent, Eurostat said in the report. Only five euro-region nations -- Estonia, Luxembourg, Slovenia, Slovakia and Finland -- had debt within the euro- region’s limit of 60 percent of GDP.

This leaves indebted European countries in an awfully precarious situation.

On one hand they have limited firepower left with debt levels increasing relative to nominal GDP even as they push austerity measure (always important to remember the debt to GDP ratio will rise as long as debt increases more than GDP and that can be in the form of flat debt and declining GDP). On the other, even if the citizens throw out leaders that favor austerity, for those pro-growth, it is unlikely to help as it doesn't address the cause of the problem... the imbalances between countries with vastly different production capabilities, demographics, beliefs, yet a shared currency.

Source: Eurostat


  1. The Euro is the monetary equivalent of the gold standard, and in the past the only winning game theory move in the gold standard was to defect first (and devalue). Either they form a more complete union capable of explicit fiscal transfers (as opposed to TARGET2 or LTRO) or they should (for their citizens well-being) break up as soon as is practicable. I fear neither will happen though, it's the equivalent of a Parliament voting to dissolve itself.

    Average European citizen, my condolences.

  2. Itamar Turner-TrauringApril 24, 2012 at 6:26 AM

    The graph label is wrong; you're showing (I assume) the EU, not the Euro zone. E.g. UK is not in the Euro.

  3. Krugman, today (4/24/12), posting on the new EuroStat budget numbers:

    "What do we get if we plot this estimated (European) austerity against the actual change in real GDP 2009 to 2011? An apparent multiplier of around 1.25 [i.e. more austerity = lower growth], not out of line with other estimates. It’s worth noting that this also implies that 1 euro of austerity yields only about 0.4 euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster."