GO
Loading...

So far at least, austerity is winning the war

George Osborne, the Chancellor of the Exchequer, poses before presenting his annual budget to Parliament, outside 11 Downing Street on March 20, 2013 in London, England.
John Phillips | UK | Getty Images
George Osborne, the Chancellor of the Exchequer, poses before presenting his annual budget to Parliament, outside 11 Downing Street on March 20, 2013 in London, England.

While there's still a war to be fought, the austerity advocates are pretty clearly winning the battle over how to fix the global economy.

Whether it's in the euro zone, the U.K. or the U.S., economies are regaining their footing not through infusions of direct government spending but rather through old-school belt-tightening.

George Osborne, Britain's chancellor of the Exchequer, ran something of a victory lap on Thursday, taunting critics of his austerity policies as growth forecasts improved for the coming years. Osborne promised a continued policy of fiscal responsibility as the path to recovery.

Earlier in the week, ratings agency Fitch stopped just short of gushing over Greece, labeling "remarkable" the nation's ability to adjust its fiscal policies as it reaffirmed the credit rating of a nation that not long ago looked like it could not continue to function as a euro zone member.

And in the U.S., gross domestic product growth leaped to 3.6 percent in the third quarter, despite a full year's worth of hand-wringing over what tax increases—the "fiscal cliff"—and spending cuts known as sequestration would do to the economy.

(Read more: Reaction:Euro zone and UK's faint signs of growth)

"I don't think there's a great mystery really about why the U.K. is improving at the moment. You've got better credit conditions and more stabilization in the euro area, which has helped," Melanie Baker, a U.S. economist at Morgan Stanley, told CNBC. "Fiscal austerity is actually dragging a bit less on the economy at the moment."

Osborne was considerably more ebullient about the region's prospects, and the cause for optimism.

"We have held our nerve while those who predicted there would be no growth until we turned the spending taps back on have been proved comprehensively wrong," he told Parliament.

While debt-strapped governments in Europe and the U.S. have tried to rein in costs, central banks have kept open the liquidity taps and held interest rates near zero.

(Read more: ECB: Inflation will be below target for 2 years)

But while heads of those central banks—such as Federal Reserve Chairman Ben Bernanke—have bemoaned the fiscal restraint, markets have reacted positively.

In Greece, government borrowing that less than two years ago briefly saw 10-year yields near 50 percent (and around 15 percent a year ago) are now below 9 percent.

Fitch reaffirmed the Greece rating at B-minus but said it remained encouraged by all the progress the country had made in reforming its once-calamitous fiscal picture.

"Primary fiscal surpluses are in sight, holding out the prospect of a stabilization in the public debt/GDP ratio," Fitch said in a statement. "Greece recorded its first ever current account surplus in (the first quarter). This was mostly due to severe import compression and debt relief.

"However, it also reflects a modest recovery of merchandise exports, buoyant tourism receipts and a significant step up in net EU transfers. Surpluses are not sustainable over the long term."

(Read more: BoE holds fire aftergrowth forecast upgrades)

Of course, everything in Europe is relative these days, and the region still has a perilously long way to go reach full health.

While Fitch noted that Greece's unemployment problem seems to have stabilized, it remains at a staggering 27 percent. GDP is improving but remains negative at 3 percent after registering a minus-5.6 percent in the first quarter.

The story is the same elsewhere. Spain briefly saw its Purchasing Managers Index rise into expansionary territory in October only to contract in November.

In Italy, though, where reforms drew huge public protests, the news was optimistic. Its PMI strengthened to 51.4 in November—above 50 indicates expansion—while the employment sub-index pushed into positive territory (50.6) for the first time since May 2011 and export orders hit their highest levels since March 2011.

Portugal, perhaps the most austere country in the zone, has seen two consecutive quarters of growth, though the third quarter was a bit below expectations.

(Read more: Cyprus sees more stability, even bitcoin innovation)

Nomura Securities said in a recent note that it expects European stocks to increase 14 percent in 2014.

In the U.S., Thursday's GDP reading gave reason to believe that the spending cuts and tax increases this year—albeit nowhere near European levels—did not tank the economy, which in fact continues to grow and seems nowhere near recession.

(Read more: Gangbuster! USgrowth surges, joblessness plunges)

As with Europe, though, economist remained cautious and warned that leaders better not get too comfortable with so many headwinds looming.

"That (austerity) narrative has a shelf life, and the shelf life ends pretty abruptly in the next couple of years," said Tom Porcelli, chief U.S. economist at RBC Capital Markets. "That's when you start to have to deal with the potential blowout in the federal deficit related to entitlements."

Without continued reform, Porcelli said, the accomplishments of the past few years could fade quickly. Huge government deficits put pressure on rates, which in turn cause deeper deficits when they rise.

"People need to really sit down and hash this out," he said. "The reality is that while conditions in the U.S. over the past couple of years have improved, that's fool's gold to some extent because you have this massive hurdle of the entitlement problem that will push deficits much further into negative territory."

—By CNBC's Jeff Cox. Follow him on Twitter @JeffCoxCNBCcom.

Wall Street