MacroScope

Never mind the pain, feel the austerity

April 23, 2012

Austerity in the euro zone seems to be working — at least as far as the headline,  dry, soulless numbers of  budget balancing are concerned. Bailed out  Greece and Ireland have reported substantial improvements in last year’s profligacy performance.  Spain, while going in the wrong direction, at least has the satisfaction of being told it is not telling fibs.

We will get to the smoke and mirrors in a bit.

First Greece, the euro zone’s poster child for budget ill-discipline. The 2011 budget deficit to GDP ratio  – basically the annual overspend — came in at 9.1 percent. This may seem like a lot given the EU target is 3 percent, but it was down from 10.3 percent  a year earlier and from 15.6 percent the year before that. Furthermore, if you take out all the debt repayments costs that Athens has to make , you end up with only 2.4 percent (although in truth that is like pretending you don’t have a mortgage).

In Ireland, the craic was all about trouncing expectations. The deficit to GDP ratio for 2011 came in at 9.4 percent, which compared with an original 10.6 percent target and even a revised target just last December of 10.  1 percent. Everything is on track, Dublin reckons, to meet this year’s 8.6 percent.

Now, those not wanting their party pooped, please look away.

The official figures suggest that Greece’s improvement is almost entirely down to increased revenues. Government spending as a percentage of GDP last year was 50.1 percent, barely changed from a year early and only a tad down from 2008. And this comes after a number of years of painful austerity that has helped keep Greece in recession for more than four years — it is into its fifth now, staring at a 4.8 percent 2012 contraction — and that has pushed more than a fifth of the country out of work. Greece’s debt (ie accumulated deficits)  as a proportion of GDP last year was 42.3 percentage points higher than in 2008.

Ireland, in the meantime, was enjoying its deficit improvement (still the worst in the euro zone) by finessing away one-off capitalisations into its banks that were worth some 3.7 percent of GDP.  Including those and some others, the deficit last year was  13.1 percent. This comes after Ireland has made budgetary adjustments totalling 25.4 billion euros since 2008 — the  equivalent to 16 percent of it 2011 GDP — and has had to hike taxes and cut spending by 8.6 billion euros between 2013 and 2015, i.e. another 5 percent of GDP. It is back in recession and seeing its exports hit by the troubles is main trading partners in the European Union are having.

In both cases, massive amounts of pain have led to some improvement — but the problems are far from gone.  The problem remains that of diminishing returns.

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