What cuts? US austerity ‘tougher than in Europe’
Despite all the "hoo-hah" over Europe suffering tough austerity measures, the U.S. has implemented a stricter program of fiscal tightening since 2010, according to a report by Lombard Street Research published Friday.
Dario Perkins, a director at the independent research firm, argued that the U.S. economy had performed relatively well, despite administering larger structural fiscal tightening than any of Europe's major economies over the last three years.
"Europe's fascination with austerity has been an important theme for markets over the past two years," he wrote in the note called "Fiscal Brag."
Austerity cuts have been central to Europe's efforts to emerge from its debt crisis, which was kicked off by the global financial crisis of 2008. In a number of countries – such as Greece and Portugal – the measures are a condition of sovereign bailouts, but the resulting wide-spread job cuts have led to numerous headline-grabbing demonstrations.
"Yet, despite all the hoo-hah surrounding European austerity, it was not just the Europeans who were cutting their deficits," Perkins added.
Using an average of figures released by the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development, Perkins highlighted that the U.S. had tightened its structural budget position by 4.9 percent of gross domestic product (GDP) between 2010 and 2013.
By contrast, the U.K. tightened fiscal policy by 3.7 percent of GDP over the three years, and Italy and Spain tightened by 2.8 percent and 4.2 percent of GDP respectively.
Meanwhile, annual economic growth in the U.S. between 2010 and 2012 averaged 2.1 percent, while much of Europe lingered in recession. Both Spain and Italy's economies contracted, for instance, while the U.K.'s grew by just 1 percent on average.
Perkins said this reflected higher levels of trend GDP growth in the U.S., but also indicated that the country's "fiscal multiplier" was lower.
A smaller multiplier (the impact on GDP of a given change in taxes and/or government spending) means that austerity measures caused less damage to the U.S. economy. The term became popular after the IMF's chief economist Oliver Blanchard said in 2012 that Europe's multiplier was higher than policymakers had assumed, meaning that budget cuts were having a deeper impact on the region's economic growth.
There are a number of reasons behind differences in impact of austerity in the U.S. and Europe, Perkins said.
"In particular, the Americans waited until after their economy was recovering before they began to tighten fiscal policy," he wrote. This meant that the banking sector was stronger, and private-sector deleveraging had started to fade.
(Read more: Why Europe may not get much cheaper)
"In contrast, the Europeans – under actual or perceived market pressures – cut government spending and raised taxes while their economies were still fragile," he added. "This compounded the pressure on households and businesses to curtail their own spending, prompting a vicious austerity-recession spiral."
He added that because Europe has a greater trade exposures – and because countries across the region tightened together – austerity caused more damage there than in the U.S. Also, the European Central Bank resisted calls to stimulate the economy with quantitative easing measures – as in implemented in the U.S. and U.K. – instead, keeping monetary conditions in the euro area relatively tight.
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