Austerity: A Solution to Restore Markets’ Confidence

Abstract

Europe’s embrace of austerity has sparked a debate among economists. This column argues that the debate has gone astray. Until the critical principle—‘how’ is as important as ‘how much’—is embraced, the austerity debate in Europe will continue to be completely out of line with the real economic trade-offs. The European debate on fiscal austerity has gone astray—focusing exclusively on the size of deficit reductions. What policy makers should really be focusing on is the budget-tightening’s composition (tax versus spending) and on the accompanying policies. Indeed, […] “Has austerity gone too far?” reflects this inappropriate emphasis on size. In our view, the essential question is not “how far” governments go but of “how” they go far enough.