Has austerity gone too far?

Europe has embraced austerity but financial markets still worry about debt sustainability – at least in part due to slow growth that has been associated with fiscal belt-tightening. Is austerity self-defeating? Is it keeping Europeans underemployed for years and thus destroying the medium-run growth needed to pay off the debt? Or are the belt-tighteners wisely steering their nations clear of Greek-like tragedies? The questions for debate are simple: Should governments let up on austerity now that the global economy is weak but credibility on fiscal sustainability is far from granted? And under what circumstances would be wise to do so?


  • Has austerity gone too far? A new Vox Debate

    Giancarlo Corsetti, 30 March 2012

    Fiscal tightening is the watchword all across Europe. The measures adopted so far have not yet proved to be a cure-all for financial market concerns about debt sustainability. They have, however, coincided with renewed economic slowdown or even contraction. This brings into question the desirability of fiscal austerity.1 Two examples: Italy and Britain How much of Italy’s slowdown is due to...

  • The austerity question: ‘How’ is as important as ‘how much’

    Alberto Alesina, Francesco Giavazzi, 3 April 2012

    The European debate on fiscal austerity has gone astray – focusing exclusively on the size of deficit reductions. What policy makers should really be focusing on is the budget tightening’s composition (tax versus spending) and on the accompanying policies. Indeed, the title of this Vox debate – “Has austerity gone too far?” – reflects this inappropriate...

  • Spending cuts to improve confidence? No, the arithmetic goes the wrong way

    J. Bradford DeLong, 6 April 2012

    In their recent ‘Lead Commentary’, Alesina and Giavazzi (2012) attack Corsetti (2012) for missing the point: “The European debate on fiscal austerity has gone astray – focusing exclusively on the size of deficit reductions. What policy makers should really be focusing on is the budget tightening’s composition (tax versus spending) and on the accompanying policies....

  • Too early to sound the alarm

    Manfred J M Neumann, 16 April 2012

    Debt finance of public consumption has clearly gone too far in several countries. Too far in the sense that it has reached if not exceeded the borderline of sustainability. Have austerity measures meanwhile gone too far, too? I don’t think this is generally the case. Let’s take GDP growth as a rough indicator. According to the IMF the global economy is likely to grow this year by 3.3...

  • The austerity debate: Make haste slowly

    Carlo Cottarelli, 18 April 2012

    The austerity debate would not be as heated if commentators focused on the current state of the world economy, rather than on how economies work in normal times. If they did, they would see that a pragmatic approach – proceed with moderate adjustment, at a steady pace, if markets allow you to do so – is the best course of action. You may call it the Goldilocks principle: fiscal policy...

  • Fiscal austerity and policy credibility

    Marco Buti, Lucio R Pench, 20 April 2012

    The renewed phase of tension in Europe, and the Eurozone in particular, since the second half of 2011, with the prospect of a double-dip recession alternating with that of a sovereign-debt crisis, has reignited the debate on fiscal austerity, to which European governments have been committed since the end of the most acute phase of the crisis in 2009. Before entering the debate, it is important...

  • Fiscal consolidation: Too much of a good thing?

    John Van Reenen, 26 April 2012

    This week’s political events in the Netherlands and France which look likely to lead to government dissolution, have been interpreted as a set-back for the pace of fiscal consolidation in Europe with popular resentment punishing incumbent leaders (“Leaders in Austerity Backlash” was the headline of the Financial Times on 24 April 2012). The response of the European economic...

  • Fiscal Rules – Help or hindrance?

    Anis Chowdhury United Nations ESCAP, 4 October 2012

    Anis Chowdhury (United Nations Economic and Social Commissions for Asia and the Pacific) and Iyanatul Islam (International Labour Organization). A fiscal rule represents legislated and long-term numerical limits on budgetary aggregates pertaining to debts, deficits, expenditures and revenues. In a recent IMF working paper1, Schaechter et al (2012) have reported on a database of fiscal rules...

  • Reduce friction or it might break: Lessons for euro members from Latvia's exchange rate and fiscal policies

    Thomas Grennes Department of Economics, North Carolina State University, USA, 29 June 2012

    By Thomas Grennes, North Carolina State University, and Andris Strazds, Nordea Bank Relevance of Latvia's experience to other countries The Latvian government responded to a severe economic shock in 2008 and 2009 by implementing a fiscal austerity program that has received praise from some outside observers and criticism from others. Olivier Blanchard expressed mild approval, but he expressed...

  • Latvia: Going beyond the fiscal austerity debate

    Anis Chowdhury United Nations ESCAP, 27 June 2012

    Latvia: Going beyond the fiscal austerity debate Iyanatul Islam and Anis Chowdhury[1] ‘What is it about Latvia’, laments Simon Wren-Lewis, that leads commentators to suspend their ‘critical faculties’ when discussing the current economic circumstances of this Baltic state?[2] Latvia is at the epicentre of the debate on ‘expansionary’ fiscal austerity. Can one...

  • Effective fiscal instruments for the European Commission

    Beatriz de Blas Universidad Autonoma de Madrid, 7 June 2012

    Fines and other sanctions are an indirect and counterproductive way of eliminating deficit bias. A more direct and credible way to solve the moral hazard problems in Eurozone fiscal policy would be for each member state to delegate executive power over an effective fiscal instrument to a European budgetary authority.   European debt levels now hovering around 100% of GDP represent a painful...

  • Greece: an entirely political crisis

    Sergio Capaldi Intesa Sanpaolo - Research Department, 18 May 2012

    Now that the latest attempt at forming a national government has failed, the Greeks will be voting again on 17 June. If surveys of voting intentions are anything to go by, the crisis is only just beginning to get really nasty.  The example of Greece is evidence of the need for reforms to be consolidated and socially fair, since – not least in order to secure greater popular support...

Moderated By

Giancarlo Corsetti
Professor of Macroeconomics, University of Cambridge and Programme Director, CEPR