In the NY Times, Scott Sayare wrote that “perhaps nowhere (…) are people so acquiescent as in Portugal”[1] because, facing a scenario of changes in short-term economic policy that include new budget cuts, more affirmative tax increases and changes in labor laws, the country has remained relatively peaceful. Similarly, more recently the Chicago Tribune[2] enhanced the attitude of the Portuguese Government that committed to a painful program of austerity and debt-reduction despite the protests of the People, while in a wealthier and more educated France, François Hollande has struggled to define and follow with conviction a solid plan for establishing the right path for the nation. However, the conditions from growth that result from a courageous action of the Portuguese Prime-Minister do not seem to be very promising and, as the Economist puts it, “he is also discovering that austerity cannot be pushed past a limit that is determined by voters[3]” even if the protest is done marching peacefully in Lisbon. In this context, it is paramount to ask ourselves: how much austerity is it too much?
Indeed, nowadays all over Europe there have been governmental initiatives to guarantee more fiscal austerity, more labor market flexibility and more price stability. And it is precisely the fact that countries are placing a great deal of hope in austerity that has led Paul Krugman to regard this situation as an “Europe`s austerity madness”. Accordingly, the massive unemployment and the almost disappearance of the middle-class are only two of the signals that indicate that austerity has already gone too far. As a matter of fact, he firmly believes that behind this “cult of austerity” is the idea that the most significant threat is presented by enormous budget deficits and so targeting deficit reductions has been perceived wrongly as the panacea for a problem inherent to private sector excess. This Austerian view was actually born because of fear that the Greek crisis, which emerged because fiscal rectitude was not followed, would be an example of the repercussions of fiscal indiscipline in other countries (anti-keynesian perspective). But the Greek debt crisis was very particular even in the EU-context and what happened was that debt crises were generated by financial crisis, not the opposite causal relationship. Henry Farrell, reputed political scientist, argues that the collapse of market confidence in Greece was seen as an example of the risks of fiscal deterioration. Furthermore, it is important to highlight that spending cuts and tax hikes combined with an economy already in depression might depress the economy further. Indeed, this effect would be clear if we were talking about rises in taxes and cut spending in the face of full-employment and if the action of the central bank is to block any inflationary risk, so that it would cut interest rates to prevent any depression in the economy caused by spending cuts. Nevertheless, Austerians are very reluctant to believe in that logic, arguing that immediate cuts are crucial to boost confidence, which in turn would make these cuts expansionary.
Concluding, there is an interesting view of the positive side of Austerity concerned with consumers’ perceptions: taking into account the government`s commitment to cut on spending, this might reflect lower future taxes, thus making them to believe that a lower tax burden would generate a positive real income effect for them and so an increase in spending once again.
[1]http://www.nytimes.com/2012/06/08/world/europe/portugal-shrugs-at-austerity.html?smid=tw-nytimes&seid=auto&_r=0
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