Debate Club

Nations Can't Forgo Austerity Without Delivering Reforms

By Gordon Gray SHARE

To address this question in the proper context, it's important to clarify what we mean by "austerity." For some nations austerity is likely unavoidable, while for others it is a poor substitute for structural reforms.

"Europe" is not homogenous, in governments nor economies, notwithstanding a common (for the most part) coin – and neither are the appropriate responses to fiscal pressures. Contrast, for example, Germany with Greece. One is a robust economy that honors its credit obligations and the other is, well, not. It is the unfortunate but inevitable reality of profligacy that bills eventually come due – and that day in whatever manifestation is painful, whether it is in the form of previous fiscal adjustment or immediate "austerity" imposed by foreign creditors.

The former is always the preferred path. However, observers should not labor under the assumption that for severely indebted countries there is a viable alternative.

[See a collection of political cartoons on the European debt crisis.]

Debt reduction can often follow two paths – gradual structural reforms, such as to tax systems and transfer programs – or immediate contractions such as new levies under the existing tax regime and reduced discretionary spending. The former is arguably a harder political "lift," as the relevant stakeholders are politically formidable, while in the latter case, forgone services or higher taxes on selected constituencies (i.e. "the rich") are more expedient. But such expedience can have adverse consequences, be it in near-term and longer-term growth. It is this "austerity" that should be avoided, but not in the absence of additional action. A bondholder would likely rest easier lending in the future to a nation with a bloated public pension system if that system is addressed in lieu of near-term tax hikes or immediately reduced services. This scenario, however, assumes that creditors are willing to allow such reforms to take hold.

Where feasible, nations should supplant "austerity" with structural reforms to more meaningfully address fiscal imbalances. But creditors will not and should not look favorably on nations that forgo "austerity" without delivering on reforms.

Gordon Gray

About Gordon Gray Director of Fiscal Policy at the American Action Forum

Tags
austerity
European Union
economy

Other Arguments

#1
154 Pts
European Countries Can't Continue on Their Spendaholic Track

No – European Countries Can't Continue on Their Spendaholic Track

Veronique de Rugy Senior Research Fellow at the Mercatus Center at George Mason University

#2
32 Pts
Europe's Self-Defeating Austerity

Yes – Europe's Self-Defeating Austerity

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#3
24 Pts
Austerity Advocates Have Been Wrong About Everything

Yes – Austerity Advocates Have Been Wrong About Everything

Dean Baker Codirector of the Center for Economic and Policy Research

#5
-2 Pts
Austerity Has Made Europe's Real Problem Worse

Yes – Austerity Has Made Europe's Real Problem Worse

Adam Posen President of the Peterson Institute for International Economics

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