A common perception among many economists and elected officials is that austerity is wreaking havoc on economic conditions in Europe.
The statement seems to be, at least according to the evidence, more academically political than fact.
The following graphic is a look at employment growth by various European countries since 2009.
On top of the growth pyramid are the Germans, with net new job creation of 1.7 million.
In second place is the United Kingdom at 1.4 million, followed by Hungary, Switzerland, Sweden, Austria, Norway, Belgium, and Iceland.
On the other end of the jobs spectrum are the PIGS, which include Spain (-2.1 million), Greece (-1.1 million), Italy (-822K), and Portugal (-571K).
Other job losers are firms in Romania, Netherlands, Denmark, France, Poland, and Ireland.
Austerity or Government Growth
Now, here’s a look at the change in government expenditures by European country since 2009.
On top in the government growth arena is Finland at 64%, followed by Belgium (55%), Span (49%), Luxembourg (46%), the U.K. (11%), Italy (8%), Germany (8%), Denmark (2%), and Ireland (1%).
On the other end, the countries with declines in government expenditures include Greece (-39%), Netherlands (-22%), Sweden (-10%), and Switzerland (-0.3%).
Is There a Connection between Government Growth and Employment Growth?
Do you see a connection between the two – government spending and employment growth?
Here’s some comments on how the rankings come out.
Germany, which has had the largest growth in employment is in the middle in terms of expenditure growth.
The U.K., the second “fastest” growing employment base in Europe, saw its government balance sheet also expand about in the middle of the pack, a little bit higher than the German experience.
On the other end of the employment spectrum, Greece, which saw the second largest decline in employment, is last in government spending growth. Mark one up for Mr. Draghi.
The largest employment loser is — Spain – has a different story. The country saw the largest declines in employment. Interestingly, the country experienced the third fastest growth in government spending. As of now, Mr. Draghi is one for four of the countries discussed here. Bet against Mr. Draghi at all costs.
Without addressing each country, its relatively easy to see that growth in government has not correlated with employment expansion. Sorry Mr. Draghi.
Austerity – Draghi Has it Wrong: Summing Up
Of course, it’s not really Mr. Draghi’s fault. Individuals in finance and economics are often taught in their beginning economics classes that expanding government spending has a multiplying effect on the economy, and therefore improves the overall economic outlook.
What these simple-minded courses forget is that the economy, and business in general, is much more complex than simple benevolent social planners.
Individuals and businesses respond to government signals and are well aware of whether spending changes are one-time or ongoing. The latter – ongoing changes – are what businesses generally use as their guide for investment.
One-time spending adjustments just don’t produce much bang, lack concrete empirical evidence for improvement in economic conditions, and set terrible precedent for consumers and other economic agents.
Overall, although monetary experts would like to blame government cost reductions for slow economic growth, Mr. Draghi and other appear to have it wrong. Their incessant desire to focus on expanding the government’s balance sheet is scapegoating, not real economics.