What Krugman Didn't Say About the U.K.'s Austerity Plan: The Ticker
In his latest New York Times column, economist Paul Krugman rightly notes that the economic troubles of Britain, which has been implementing austerity measures, serve to undermine the conservative idea that slashing government spending will somehow bring about a confidence-driven economic boom.
That doesn't, however, mean the U.K.'s austerity plan is a failure.
True, the U.K. economy shrank in the fourth quarter of 2011, and by at least one measure -- change in real gross domestic product since the recession began -- Britain is in worse shape than it was in the wake of the Great Depression.
But by another measure -- the cost of insuring sovereign debt against default -- Britain is doing a lot better than other European nations that didn’t implement similarly ambitious deficit-reducing measures. The cost of insuring U.K. government debt currently stands at about 80 basis points (meaning 80,000 pounds a year to insure 10 million pounds of UK government debt for five years). By contrast, the same insurance on Italian and French debt costs 400 basis points and 165 basis points, respectively.
During the darkest days of the financial crisis in 2009, before the U.K. started acting on its austerity plans, the picture was very different. Insurance on Italian debt cost only slightly more than that on U.K. debt, and insurance on French debt cost a lot less.
In other words, markets have lost much more faith in the creditworthiness of Italy and France than they have in Britain's. That means Britain doesn't have to pay as much interest on its current debts, giving it a much better chance of getting those debts under control and avoiding the kind of market-enforced austerity that much of continental Europe now faces.
Britain's relative success in the credit markets isn't necessarily an argument against a combination in the U.S. of short-term stimulus with longer-term plans to get debt and deficits under control. Nor does it mean that austerity is the sole answer to Europe's troubles. We can never know what would have happened if Britain had embarked on a stimulus program instead of opting for austerity. But it's certainly possible that it would be even worse off than it is.
(Mark Whitehouse is a member of the Bloomberg View editorial board.)