U.S. austerity flouts a growing international consensus

Austerity Ahead

With a series of automatic, across-the-board spending cuts going into effect in the United States, Americans appear to be on the verge of their own experiment in European-style austerity, which has many in Europe wondering why.

Just as Europeans have begun to turn their backs on the harsh austerity measures once championed by international institutions such as the IMF and EU, the U.S. seems inclined to give them a chance. This is especially curious considering that a consensus has emerged not only among economists but most major international organizations that austerity is economically counterproductive and places an undue burden on the most vulnerable members of society.

The economic committee of the OSCE’s Parliamentary Assembly (OSCE PA), which counts the U.S. as a member, adopted a resolution last July condemning austerity measures and calling instead for greater economic investment in green growth.

Stating that “excessive austerity [is] economically counter‑productive, destructive for the most vulnerable members of society and destabilizing for democracy,” the OSCE PA’s Monaco Declaration encouraged governments of OSCE participating States to carefully analyze the long‑term effects of austerity-driven budget cuts.

Since that resolution was adopted a growing chorus has emerged against austerity measures and fiscal consolidation as remedies for the economic crisis. Indeed, many international organizations – even those such as the IMF that have historically been the strongest proponents of austerity – now concede that austerity is having negative impacts on overall economic recovery and are advocating new approaches in dealing with the crisis.

A report issued by the International Monetary Fund in January 2013 concluded that the growth-dampening effects of austerity-driven spending cuts had been previously underestimated and that the IMF’s earlier prescriptions for tough austerity measures as a solution to the sovereign debt crisis are not having the desired economic effects. In the report, the IMF’s chief economist Olivier Blanchard conceded that the IMF had, in particular, underestimated the multiplier effects of the austerity measures it had urged governments to adopt. Specifically, the IMF found that every dollar that governments cut from their budgets actually reduced economic output by 1.50 USD.

The findings suggested that economies with larger planned fiscal consolidations tended to have lower economic growth and that because of the binding zero lower bound on nominal interest rates, central banks could not cut interest rates to offset the negative short-term effects of a fiscal consolidation on economic activity. Further, lower economic output and lower income, combined with a poorly functioning financial system, implied that consumption may have depended more on current than on future income, and that investment may have depended more on current than on future profits, with both effects leading to larger multipliers.

Speaking at the “Social Care in Times of Crisis” event in Brussels on Nov. 15, 2012, the European Commissioner for Employment, Social Affairs and Inclusion László Andor conceded that austerity and fiscal consolidation alone could not solve the economic crisis. Rather than focusing solely on austerity, he said, governments need to seek new paths to growth particularly by improving governance, increasing co-ordination and growing competitiveness, as well as by improving innovation in the area of social policies.

In this respect, Andor emphasized that austerity measures and longer-term consolidation efforts must be combined with comprehensive and ambitious social policy agendas for sustainable and comprehensive growth, as well as with concrete guidance for the modernization of Europe’s welfare systems.

The Organization for Economic Cooperation and Development’s latest Economic Outlook Report, released Nov. 27, 2012, concluded that the global economy is once again in decline, identifying several causes for the diminished outlook, including a significant drop in confidence, simultaneous fiscal consolidation across countries, as well as contracted global trade.

High unemployment is depressing confidence and spending, the OECD noted, and the lack of confidence largely reflects insufficient or ineffective policy responses, both in terms of inadequate short-term action and a lack of credible long-term strategies. “This, in turn, seems to be determined not so much by a lack of understanding of the policy requirements,” according to the OECD analysis, “but rather by failure to reach consensus on the policy response.” In particular, the OECD noted that “fiscal consolidation, while necessary, has affected growth.”

The annual UN report, World Economic Situation and Prospects (WESP) 2013, released on Jan. 17, concluded that the euro area is in recession and projected that the Gross Domestic Product (GDP) of the region is expected to reach only 0.3 percent in 2013. This growth could strengthen marginally to 1.4 percent in 2014, but the euro area sovereign debt crisis and attendant fiscal austerity programs are nevertheless continuing to depress growth in the region.

The WESP report warned that the current economic policies of Western European governments are failing to address key short-term issues of restoring growth in the region or how to put the crisis countries on a firmer footing to promote fiscal sustainability. At least five economies are now in recession, the WESP concluded, with Italy’s GDP expected to decline by 2.4 percent in 2012 and 0.3 percent in 2013 and Spain’s by 1.6 percent and 1.4 percent, respectively. The other countries in recession are Cyprus, Greece and Portugal, with poor prospects going forward. The WESP warned that the sovereign debt crisis could erupt this year, impacting on bank solvency and depressing confidence, and forcing governments to make up for growth shortfalls by introducing new austerity measures.

Noting that consumption levels are expected to remain weak in the outlook, the WESP points out that austerity programs are compounding the problem by reducing consumer confidence and depressing consumption. Further, the unemployment rate in the euro area climbed to 11.6 percent in September (up 1.3 percentage points from one year ago), with significant regional differences. Countries undergoing austerity have some of the highest unemployment rates, with Spain and Greece suffering unemployment levels above 25 per cent and Portugal at 15.7 percent.

The UN has also warned that austerity is leading to diminished respect for human rights.

In an address to the UN General Assembly on Oct. 23, 2012, the Chairperson of the UN’s Committee on Economic, Social and Cultural Rights, Ariranga Govindasamy Pillay, noted that harsh austerity measures may be violating Member States’ legal obligations under the International Covenant on Economic, Social and Cultural Rights. “All States Parties should avoid at all times taking decisions which lead to the denial or infringement of economic, social and cultural rights,” Pillay said.

UN High Commissioner for Human Rights Navi Pillay also weighed in on the austerity question, with particular focus on the effects on migrants, refugees and minorities, as well as on governments’ responses to widespread protests against austerity. Speaking on Oct. 18, the High Commissioner said that while governments “may be compelled to take decisive action to improve their economic situation,” they should not do so at the expense of “the hard-won rights of their populations, and in particular those of the most vulnerable, including minorities, migrants and the poorest sectors of society who were already struggling to make ends meet.”

Austerity must respect the principle of equality, avoid discrimination, and be accompanied by measures to mitigate the effect of the crisis on the most vulnerable, Pillay said. She expressed concern that the debate about migrants, refugees and minorities “may lead to further discrimination and marginalization as dominant groups look to secure their own futures and search for scapegoats.” Further, she noted that in some countries social tensions inflamed by the economic crisis have led to violent attacks on migrants, and that the police have responded excessively to demonstrations against austerity measures.

As the U.S. prepares to embark on its own trial with austerity, it should bear in mind these conclusions that have been so painfully reached by the international community in response to the last several years of European austerity.

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