Is austerity hampering economic growth?

In recent elections, voters voiced their opposition to austerity measures, which many attribute to continued poor economic growth. The age of austerity as a four-letter word has arrived. But the question policymakers and analysts are asking is whether austerity is the cause of the current fiscal struggles.

With the elections returns counted and new leaders in office, Europe is working to address the growth versus austerity debate.

Robert Barro contends that further stimulus – the anti-austerity path – would not necessarily place European and American economies on the path to recovery.

“Two interesting European cases are Germany and Sweden, each of which moved toward rough budget balance between 2009 and 2011 while sustaining comparatively strong growth—the average growth rate per year of real GDP for 2010 and 2011 was 3.6% for Germany and 4.9% for Sweden. If austerity is so terrible, how come these two countries have done so well?,” he asks in the Wall Street Journal.

Barro also notes that stimulus has had little impact on U.S. budget deficits (averaging 9% of GDP between 2009 and 2011).

Carsten Volkery writes in Der Speigel that European Union is refocusing its attention on austerity measures and concentrating on investment is a better way forward.

“After two years of rigid austerity aimed at combating the European debt crisis, the EU would appear to be changing its course. Disappointing economic data in southern Europe and the recent Greek election, where voters made their rage at the mainstream political parties clear, has apparently led to a rethink. European leaders have come to the realization that austerity alone just makes the situation worse. Now, the time to invest has arrived,” he reports.

 

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