Troika divided over austerity

Published on 29 January 2013 at 16:05

“Will austerity lead to the death of Europe?” The question posed by the Frankfurter Rundschau has been raging within the troika of the international donors (EU-ECB-IMF) and provoking a heated battle of appraisals and counter-appraisals among the experts of the European Commission and the economists of the International Monetary Fund.

The key to the dispute, explains Rundschau, is the “multiplier", the figure that reveals the point at which an austerity policy begins to weigh down the economy of a country. If a reduction in public spending of €1 leads to a decrease of GDP of €1, then the multiplier is estimated at one. If the figure is two, the budgetary cuts are asphyxiating the economy and widening the deficit because they are reducing tax revenues. If it's 0.5, they have little influence on economic health, and austerity works out to be a good deal for the state.

Except that two IMF economists have found that expert opinions on European countries in crisis have consistently underestimated the famous multiplier, especially in the case of Greece.

The European Commission was quick to respond with a counter-appraisal that austerity is all for the good.

Can peace in the troika be restored? That will have to wait until the current recession ends and the numbers get back into some shape and order, Rundschau believes.

It will then be up to the politicians to pick and choose the theory that suits them.

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