First, the news release (via NY Times/AP)
BRUSSELS (AP) — Official figures show the austerity medicine pursued across a number of European countries is working, at least when it comes to reducing annual borrowing levels.
Eurostat, the European Union’s statistics office, says Monday that the cumulative level of government deficits across the 17 EU countries that use the euro dropped in 2012 to around 353 billion euros ($460 billion) from 391 billion the year before.
As a result, the budget deficit of the whole eurozone fell to 3.7 percent of the region’s annual gross domestic from 4.2 percent in 2011.
Though the spending cuts and tax increases are helping to reduce deficits, the eurozone’s debt burden rose because economic growth has flat-lined. In 2012, eurozone debt was worth 90.6 percent of the region’s annual GDP, up from 87.3 percent.
What doesn’t match here??? Well, almost everything. It is kind of ridiculous to claim austerity works because on the aggregate level budget deficit levels are shrinking. This is a basic logical fallacy. Austerity is a policy which inflicted to individual states, and since there are also states that still grow, there is less need to spend (or borrow) for governments. Case in point: extreme austerity in Greece is not doing much in reducing budget deficit OR total government debt. Same for Spain. Similarly, Estonia, which has seen quite good growth over the last year at least, has seen a budget surplus slide into a deficit. LAtvia, which does a lot of catching up after a dramatic plunge in GDP, sees some shrinking budget deficit but not much total government debt reduction (but lots of people voted with their feet and left). Finland has a shrinking economy, but also a shrinking budget deficit and an increasing total debt burden. And we are now not even talking about the effects on the economy of austerity, especially in terms of unemployment.
It is totally meaningless to say that austerity works in reducing annual borrowing levels, because this aggregate doesn’t have any impact on policy anywhere (although Rehn & Co probably see this as a vindication after the failure of R-R.) Furthermore, nowhere is the institutional difference between countries acknowledged regarding the welfare state (i.e. limits on unemployment benefits etc).