An European research shows that the restrictive measures of each country impact, not only on himself, but also on the others, and bounces on the country itself. The conclusion is that the entire line of the fiscal compact that must be changed.
On 20 November, the newspaper Libération devoted a long article to the work of a Dutch economist, Jan in 't Veld, who works at the European Commission (Economic Affairs). The title of the article was: "Rigor, also Brussels no longer believes it, a study by an economist from the Commission reveals the weight of the harmful effects of austerity in Europe."
The emphasis of the title is clearly exaggerated, the work reflects only the point of view of the economist, and it is in addition to the work conducted by IMF economists, critics of austerity line (see the article by Mario Nuti,“Pervers fiscal consolidations”, Insight). However, the interest of the work consists of an estimate of the spillovers between euro countries, i.e. the influence that the economic measures carried out in a country have on the other countries, with which it has economic relations.
The Dutch economist analyses the fiscal policy in the period 2011-2013 in seven countries euro: Germany, France, Italy , Spain, Ireland , Portugal and Greece, and the rest of the euro area (Rea) combined into a single group . Jan in 't Veld uses the structural model QUEST of the Commission, which allows to assess the impact that each country has on others, when adopting economic measures, both in case of public expenditure cuts or increases in the tax levy. It is clear that the effect depends on the economic weight of the country, then greater for Germany, and also the intensity of economic relations, which explains why the neighbouring countries around Germany receive a stronger effect.
The following table shows the multiplier effects of a progressive cut in three years, three-point deficits, led by decreases in expenses for half and half from tax increases . The cut is then maintained throughout the subsequent period. I just report the effects of (de) multiplying the third year, for Germany, France, Italy and Rhea . These are the countries of greatest dimension, where spillover effects are stronger .
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Germany France Italy Spain Rea
Germany -2.31 -0.44 -0.42 -0.22 -0.40
France -0.51 -2.49 -0.41 -0.23 -0.35
Italy -0.48 -0.40 -2.49 -0.21 -0.32
Spain -0.50 -0.44 -0.41 -2.34 -0.33
Rea -0.57 -0.43 -0.39 -0.21 -2.06
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Reading along the columns we see the multiplier effect (negative) of a cut of three percent of GDP, on the country itself and on the others. Thus, in Germany there is a direct drop equal to -2.31 points (which implies an average multiplier of -0.77), but there is also an effect on France of -0.51, on Italy-0.48 , until to -0.57 on Rea . But the effect on France is also reflected on Italy with a weight of -0.40 multiplied by 0.51, that is -0.204, as well as the effect on Italy reflects on France with a weight of -0.48 multiplied to 0.41, i.e. -0.197.
On the other hand there is a feedback effect, since the French manoeuvre has an effect of -0.44 on Germany, the effect of Germany on France returns on Germany itself with a weight of -0.51 multiplied by 0.44, i.e. -0.224, and the same happens with Italy, with -0.48 multiplied by 0.42 , i.e. -0202. The same goes on for all other countries. The restrictive measures of each country impact, not only on himself, but also on the others, and bounces on the country itself.
Jan in 't Veld calculates, based on the estimation of the effects of spillover, the maximum recessive effect that would have occurred if only one country had carried out in the period 2011-2013 the restrictive measures, and what happens when all countries act simultaneously:
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Germany France Italy Spain Ireland Portugal Greece Rea
Alone -2.31 -2.49 -2.49 -2.34 -2.06 -1.44 -2.09 -2.26
Together -3.90 -4.78 -4.86 -5.39 -3.22 -6.91 -4.51 -8.05
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As you can see when you switch from the case in which one country makes the restrictive measures to that of all countries doing austerity simultaneously, the fall in GDP in the third year increases from a minimum in the case of Rea (1.16) and Germany (1.59) to a maximum for Ireland (5.47) and Greece (5.79).
However, in the model used by the economist Dutch there is the assumption that after the third year traders regain confidence, relying on a lower level of taxation. It is the neo-Ricardian hypothesis of expansionary austerity, endorsed by the Troika, an ad hoc assumptions introduced in the model. Obviously the fall in GDP is reduced, and the ratio of public debt - GDP goes down. However, even in this case, the decline in GDP continues for several years beyond the third, for example in Germany for three years, four in France, and in Italy for all five (simulations ending in 2018).
Jan in ' t Veld also considers the case where there is an increase in the risk premium against the sovereign debt of countries in the euro periphery, the PIIGS. In this case, the fall in GDP is accentuated in these countries between one point and a half and two and percentage points, but, because of spillover effects, even in core countries there is a decrease of about one percentage point.
What caught the attention of Libération is not so much the role of spillovers, but the conclusions of the Dutch economist. Jan in ' t Veld suggests that Germany and Rea differ from the austerity policy, and increase deficit in the form of a percentage point for public investments. Within two years, the GDP of Germany and Rea increases by almost one percentage point, while in the rest of the countries there is a positive effect slightly greater than 0.2 (0.3 in the case of Ireland). The current account balance of the two countries decreases by about 0.3, while that of other countries increases from 0.05 to 0.1. It certainly cannot be said that for the countries in the euro periphery there is a substantial improvement, although it is implausible that in Berlin the paper has been accepted with enthusiasm. In fact from the point of view of the periphery the conclusion is that it is the entire line of the fiscal compact that must be changed.