Despite its frequent use through the media and in political debate, few journalists and politicians actually use the term “austerity” correctly. But Cypriot Finance Minister Harris Georgiades does.
In an interview with The Wall Street Journal this month, he refused to label Cyprus’s budget adjustments to date as “austerity.”
I won’t call what we’re doing austerity, it’s fiscal consolidation,” he said. “Austerity is to spend less than what you have and we’re still spending more.
To most people, this is simple common sense. But to spendthrift politicians and drama-hungry journalists, this does not compute. Any cut, regardless if it results in a decrease of total spending or not, constitutes “austerity” to then be demonized. The sequester, whose tiny economic effect belied its massive political doom saying, is a prime example of this here in the U.S.
Georgiades is right on the money, as I point out in my new study, The True Story of European Austerity: Cutting Taxes and Spending Leads to Renewed Growth. Not only has Cyprus not implemented austerity, but neither have most other European countries. And only four have actually decreased spending and taxation below pre-austerity levels: Bulgaria, Ireland, Latvia, and Lithuania.
This group of countries also had the highest rate of economic growth than any other group of European countries carrying out an alternative form of “austerity.” And here, Georgiades gets it right again (though he brands himself as a heretic among Krugman-ites and Europe’s Keynesian elite in doing so): “Much public spending in Southern European economies, including Cyprus’s, has a negative effect on growth because it crowds out the private sector.”
European leaders are starting to catch on. Austerity unburdens the economy to grow. But austerity must entail real cuts, not more modest budget growth disingenuously touted as skinning government to the bone.