Transatlantic austerity, 2010-13: A comparative assessment

Drawing on a large data collection, this paper offers a comprehensive assessment of fiscal austerity in twenty-nine major countries in the Transatlantic area in the aftermath of the Great Recession of 2008–09. Countries include the seventeen Euro members as of 2013, and twelve non-Euro countries, the ten other members of the European Union, United States and Canada. The paper is organized in two parts. First, an index of austerity is proposed based on the contraction of the public sector’s net contribution to the economy. Then, there follows an assessment of austerity under the two dimensions of the improvement of public finances and interest rates, and of the collateral effects on economic activity and employment. The assessment is accompanied by reasoned discussion of the theoretical motivations and underpinnings of fiscal austerity and relevant criticisms. The main conclusion is that austerity in general has so far missed its promised goals, for (1) except budget deficits, public finances have further deteriorated, (2) countries under stronger austerity have achieved neither consolidation nor faster recovery but rather lower shock absorption, worse recovery performances, and higher unemployment. Claims that austerity failures are due to country-specific factors, such as mistakes in implementation and pre-crisis structural weaknesses, are not supported by robust evidence.