Great Graphic: Austerity and Employment

The economies of most high income countries remains below the pre-crisis peaks.  The US, Germany, and it now appears, the UK, are the notable exceptions.  On the eve of the EU summit, there continues to be a debate over fiscal policy.

The rise of anti-EU parties in the European parliament election has strengthening calls to permit even more flexibility regarding the agreed upon fiscal goals.   France and Italy appear to be pushing hardest, but Spain has recently announced new tax cuts.  Merkel's junior coalition partner, the SPD continues to appear more sympathetic than the CDU and the Bundesbank to such efforts.  

This Great Graphic was posted on Business Insider by Rob Wile.  He got it from Ben Wolcott of the Center for Economic and Policy Research.  The horizontal axis measures the change in the structural balance since 2010.  The vertical axis measures the change in employment rates.  The slope of the line offers statistical confirmation of what seems intuitively obvious:  tight structural fiscal position is associated with weaker labor markets. 

Evidence that austerity can produce growth is elusive.  Even in the UK, where the Tories claim their austerity has worked, is structural balance, its austerity has not been as great as the US, for example.   Spain, Portugal and Greece really stand out.  Italy did not have a large budget blowout so there was less of a correction needed.  Italy's large stock of debt (past deficits) and meager growth posed a greater challenge than the current structural budget position.

Sustaining aggregate demand during a phase of household, banking and government retrenchment is the main challenge.  Addressing this will reduce the deflationary risks in Europe, but reducing the inflationary risks by introducing negative deposit rate or making cheap funding available to banks who do not want it, so they lend to small and medium size businesses, where demand is lackluster, will not address the lack of demand. 

Great Graphic: Austerity and Employment Great Graphic:  Austerity and Employment Reviewed by Marc Chandler on June 25, 2014 Rating: 5
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