Public spending: one rule for EU ‘core’: another for the ‘periphery’

 

In a report published today at the Hay Festival, PRIME economists review the preliminary results of the implementation of austerity policies across the EU, and note that government spending has risen in the ‘core economies’ but fallen in those on the ‘periphery’.  Results have been detrimental for economies, most notably Greece and Ireland, and perverse for deficits. The results are, however, in line with the predictions they made in an earlier paper “The economic consequences of Mr Osborne”(June, 2010). Namely that cuts in government spending would, contrary to conventional economic wisdom, lead to a rise in deficits at a time when the world economy remains in a precarious condition.

In a new, revised version of the paper, the experience of EU 15 countries is examined according to the level of government expenditure growth in 2010. The results show very clearly that there is one rule for the ‘core’ and another for the ‘periphery’.  That ‘core’ country governments urge those on the ‘periphery’ to effectively, “do as I say, not as I do.”

Government spending increased in eight EU countries within the ‘core’, including the UK, Germany and the Netherlands. These countries’ deficits have remained more or less unchanged but GDP has increased.

By contrast, countries on the ‘periphery’ - Greece, Ireland and Spain – cut government spending with a range of outcomes for the deficit, and a decline in GDP.

Addressing a meeting at the Hay Conference, Ms Pettifor, one of the authors of the report said:

“The Dutch and German governments are guilty of double standards. Backed by the ECB and IMF, they have been forceful in their economic advice to Greece, Ireland and Portugal, to ignore public opinion, and slash government spending. The Dutch Finance Minister, Mr De Jager has gone so far as to advise Greece to abandon the democratic process and ‘surrender operational control’ over the privatisation of Greek assets (FT Alphaville, 26 May, 2011)."

“Yet neither the Dutch nor German governments is willing to surrender their nations’ interests to the consequences of austerity policies. Both countries increased government spending in 2010, by 3.6% and 3.1% respectively. Germany’s deficit fell, and that of the Netherlands barely changed. It is time to end this hypocrisy at the heart of European policy-making, and to learn the lessons of the 1930s, when austerity led to unemployment, fascism and war.”

Notes to Editors:

  1. Ms Pettifor will be at the Hay Festival on Tuesday, at 8.15 p.m. on 31st May, 2011. She will be speaking at a session titled; “What if the banks crash again?” hosted by the new economics foundation.
  2. An updated version of the report: ‘The economic consequences of Mr Osborne’ can be found on the website of PRIME – Policy Research in Macroeconomics – www.primeeconomics.org
  3. Countries with falling nominal government final consumption expenditure, 2009-10. (Source: Eurostat)

Country% increase in nominal government expenditureChange in government budget surplus/deficit (% point of GDP)% change in GDP

Austria-0.1-0.52
Spain-0.9+1.9-0.1
Ireland-2.8-18.1-1
Greece-12.8+4.9-4.5
  1. 4. Countries with rising nominal government expenditure between 2009-10. (Source: Eurostat)

Country% increase in nominal govt spendingChange in government budget surplus/deficit (% point of GDP)% change in GDP

Luxembourg5.7-0.8+3.5
Sweden5.5+ 0.7+ 5.5
Netherlands3.6+ 0.1+1.8
Denmark3.50+2.1
Germany3.1-0.3+3.6
France2.8+0.5+1.5
Belgium2.5+1.8+2.2
United Kingdom+2.4+1+1.3
Finland2.2+0.13.1
Italy0.7+0.81.3
Portugal0.6+11.3