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Austerity Plans Pick Up Steam

October 21, 2010

The big news in Europe this week is the continuing push by governments to introduce austerity measures to reduce government spending.  The British government introduced a budget this week that includes spending cuts across the board, including reducing government payrolls by 500,000 employees and total cuts of about $130 billion through 2015.  Similar to the British plan, a bill is making its way through the French parliament that will increase the retirement age.  The result has been massive protests by French unions, which are starting to take their toll on life as gasoline is becoming scarce at gas stations.  In perhaps the greatest victory for the French unions, Lady Gaga announced that she will be postponing concerts in France due to the logistical difficulties caused by the strikes.

While Americans may not understand the protests in France about increasing the retirement age to 62, the extent of the British austerity plan is a little more complex.  NPR’s Morning Edition tried to make the cuts understandable to an American audience yesterday morning. (To listen, click here).  Cuts to the U.S. Federal budget would have to be a quarter of a trillion dollars to be the same proportion as the cuts announced by the British government this week.  Also, about six million Britons work for the government (compared to only two million Americans are employed by the Federal government), so while cutting 500,000 jobs is definitely a lot, it is a smaller proportion than if it were to happen in the U.S.  However, these cuts are still rather dramatic, so why would the UK travel down this path?

An article in today’s New York Times argues that this move towards austerity is part a reflex to worries that European economies are not large enough to withstand pressures in the international financial markets if these markets believe that European government deficits are too high.  The U.S., due to being the largest economy in the world and having the dollar as the international reserve currency, can still cheaply sell government debt.  The UK deficit is expected to be 11 percent of GDP this year, ironically in large part due to the bailout of British banks.  In Ireland, the budget deficit will reach a whopping 32 percent of GDP.  The New York Times also suggested that the European governments are resting on the belief that the U.S. will continue to be the engine of global demand, allowing these European governments to cut budgets without experiencing severe contractions in their own economies.

The debate over austerity in Europe is certainly not over, and in order to better understand the rapidly shifting government economic philosophies from Keynes to austerity, IU European Union Center will be sponsoring the “European Responses to Economic Crisis: Lessons for the U.S.” on April 7 and 8 in Bloomington.

One Comment leave one →
  1. eubeyer permalink
    October 25, 2010 9:22 am

    The New York Times has also weighed in with an article discussing the possibility of the U.S. adopting austerity plans similar to those that were announced last week in the UK, complete with some useful graphics:

    “The British Ax, if Imported to the U.S.”

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