Angela Merkel's successful re-election should give us pause to reconsider what has happened in Europe since the global financial crisis erupted in September 2008. Contrary to what most of our loud commentariat would have us believe, "austerity" or fiscal responsibility is apparently popular. Ms Merkel's success shows what has been wrong in so much of the public debate about the global financial crisis.
More than anybody else, Ms Merkel is responsible for having kept together the European Union (EU) and the euro area. No country has abandoned the euro. Considering that the total public debt of the 17 euro countries was about 91 per cent of gross domestic product (GDP) in 2012, she has faced up to the need to limit its increase. She has been forced to participate in the bailouts of no fewer than eight of the 28 EU member countries since October 2008. Ms Merkel has also contributed to the groundwork for stronger EU financial institutions.
At the time, the actions by Ms Merkel and the EU appeared too slow and half-hearted. But mistakes are always made in crises, and successful politicians keep diverse constituencies on board, as she has managed to do. The fundamental question is whether you end up afloat, and Europe has. Thanks to substantial reforms, because of the crisis in most EU countries, Europe will probably come out with a higher growth rate.
During the height of the euro crisis, Jean-Claude Juncker, then prime minister of Luxembourg, made a statement that encapsulates everything that is wrong with the political thinking about the crisis: "We heads of government all know what to do, we just don't know how to get re-elected when we do it." These words have stuck in the public mind as an evident truth, but they are patently untrue.
Mr Juncker's words reflect the contempt of elites for their voters, suggesting that citizens are short-term vote cattle while the political leaders are wise. The financial crisis in Europe has shown that the opposite is true. Governments that pursued short-term and irresponsible fiscal policies in the vain hope of temporary growth improvements have been thrown out by the voters, while quite a few fiscally responsible governments have been re-elected.
Five years have passed since the global financial crisis erupted. By my count, 19 of the 28 EU governments have been thrown out by their voters in this period (Austria's parliamentary elections occurred before and after the period in question), while eight have been re-elected, namely the governments of Estonia, Finland, Germany, Latvia, the Netherlands, Poland, Sweden and, indeed, Luxembourg.
These eight countries have centre-right governments and have pursued responsible fiscal policies. Before the crisis they had budget surpluses. In the depth of the crisis in 2009, their budget deficits averaged four per cent of GDP, moving to 1.6 per cent in 2012. By contrast, the other 19 EU countries whose governments were not re-elected had budget deficits during the boom, which deepened to 7.6 per cent of GDP in 2009, firming to an average deficit of 4.8 per cent in 2012. Both groups of countries carried out a fiscal tightening of almost the same size, but the re-elected governments started out with better fiscal balances before the crisis and could, therefore, better withstand it.
No single European country carried out any real fiscal stimulus - that is, increased their already enormous budget deficits of 2009. Nor could they have sensibly done so. Hardly any country had fiscal space, given that the average public debt in the EU had risen to 91 per cent of GDP in 2012. In fall 2008, Latvia and Romania lost access to international financial markets although their public debt was less than 20 per cent of GDP. Arguably, Sweden and Luxembourg had fiscal space, but that would have made no difference to the EU as a whole, and Sweden had growth of 6.6 per cent in 2010, so it was close to overheating. Germany had an ominous public debt of 82 per cent of GDP in 2010, which left no fiscal space because Germany was the financier of last resort for the whole of the EU. Thus, the whole discussion of fiscal stimulus in Europe has been unrealistic and irrelevant.
Nor have large budget deficits been good for economic growth. Whatever growth measure we use, the eight virtuous governments have outperformed the 19 rejected ones. From 2009 to 2012, these eight countries had average annual economic growth of 0.3 per cent, while the 19 spendthrift countries contracted annually by one per cent. The virtuous countries staged a dramatic recovery. In 2009, they suffered from a large output fall of 7.1 per cent compared with a decline of 5.3 per cent in the other 19 countries. In 2012, by contrast, the countries with re-elected government had average growth of 1.4 per cent, while the other 19 countries contracted by 0.8 per cent. The reason for the sharp recovery in the virtuous eight is mainly that they carried out more structural reforms during the crisis.
Apparently, European voters are far wiser than most of their leaders. The voters understand that large fiscal deficits are no good for them or their children, and they vote for politicians who share their beliefs.
The writer is a senior fellow at the Peterson Institute for International Economics
Bloomberg View
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