The Myth of European Austerity

Don't believe the left wing hype.

Austerity
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Lenwood Brooks is policy director of Public Notice, an independent, nonpartisan, nonprofit dedicated to providing facts and insight on the economy and how policy affects our financial well-being.

When French President Nicolas Sarkozy was ousted by his socialist opponent Francois Hollande on May 6, the verdict from opinion leaders was swift and certain: France's election results represented a sure repudiation of Europe's strategy of government budget cutting to restore the economy.

But a closer look at how austerity has actually played out in Europe tells a much different story—and offers a lesson for American policymakers.

The austerity agenda, critics have it, in which debt-laden governments have slashed services and social programs, has angered European voters. Worse yet, the critics claim, it's not working, as European nations that have followed this supposedly vicious austerity program are struggling with nonexistent growth and slipping back into recession.

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

And their solution is entirely predictable: austerity critics call for additional debt-fueled stimulus spending, despite the fact that trillions have already been spent to kick-start the European economy, to little effect.

However, it turns out that those blasting Europe's experience with spending restraint omit some critical facts. Contrary to what you may have heard, spending cuts have largely been lacking in Europe's economic crisis response. Instead, in most European nations, austerity has mostly taken the form of higher taxes. We shouldn't be surprised Europe is struggling: when you raise taxes in a weak economy, it has a negative effect on investment and economic growth.

[See a collection of political cartoons on the economy.]

In fact, most countries in Europe are spending more today than they did before the 2008 crash, according to financial reports from the European Commission, the European Union's executive arm. Yet austerity critics want to attribute the sluggish European economy entirely to spending cuts. France and the United Kingdom, for example, have made virtually no effort to cut spending; they've seen spending increase nearly every year over the last decade.

Many European nations have embraced the so-called "balanced approach" strategy, meaning a combination of tax increases and spending cuts. Unfortunately, that approach has disappointed. Those nations that have followed a purer course of spending restraint, like Estonia, have seen superior growth. On the other hand, while countries like Greece and Italy have cut some spending, they've undermined their progress by raising taxes at the same time.

Moreover, that "balanced approach" is rarely all that balanced. In most cases, tax increases have been larger and more quickly implemented than spending cuts. For example, only about 30 percent of the budget cuts the United Kingdom had slated to go into effect between 2010 and 2015 have been implemented, according to a May 14 report in the Wall Street Journal. The tax hikes, however, are securely in place.

[Check out political cartoons about the budget and deficit.]

Critics of "austerity" would have you believe Europe is suffering because they have embraced radical frugality, cutting public spending and turning away the poor and needy. The evidence proves that's not true.

Yes, European nations are struggling with economic woes, but those woes don't stem from spending restraint—they stem from a broad variety of factors, including high levels of taxation, fractious E.U. politics and the hard demographic realities of an aging population demanding greater levels government support.

Austerity critics hope to derive lessons for the United States from the other side of the Atlantic, but they overlook critical differences between the United States and Europe. For one, most American voters have a more skeptical view of government spending. In polling conducted last month by the Tarrance Group for my organization, Public Notice, respondents expressed little confidence in the federal government's fiscal management skills, estimating that 47 percent of every federal dollar is wasted.