Austerity Isn't the Answer

European Straits #25

Dear all,

Do you share my impression that we’re forever stuck in the trade-offs of the past—between households and businesses, spending and slashing, the demand-side and the supply-side? Even France’s Emmanuel Macron has recently seemed to renege on the revolutionary ideas of his campaign as his government converts to what looks like outright, uninspired austerity. In the past few days, every French minister has been asked to dramatically reduce spending, while some tax reforms were postponed for fear that the French deficit would spiral out of control.

Yet, as Mark Blythe once argued in this Foreign Affairs article, the advantages of austerity are highly contingent on a country’s trading position. Germany, an export powerhouse, has the luxury of practicing austerity at home because most of its businesses depend on foreign demand. Likewise, the Canadian government effectively implemented austerity in the 1980s and the 1990s because it could rely on the fast-growing US economy where most…