Figures today suggest that real wages are growing for the first time in three years. Photographer: Simon Dawson/Bloomberg

U.K. Shows That Austerity Works

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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The U.K. has been the poster child for the school of economic thought that favors tighter purse strings, rather than Keynesian pump-priming, as the correct solution to an economic downturn. So far, the austerity camp seems to be winning the argument.

Figures today suggest that real wages are growing for the first time in three years. The average increase in U.K. weekly earnings was 1.7 percent in February; data yesterday showed annual inflation slowed to 1.6 percent in March, from 1.7 percent the previous month. Brits may finally be enjoying an increase in purchasing power.

There was good news, too, on the jobs front, with unemployment dropping to a five-year low of 6.9 percent in February. Had the Bank of England not abandoned the primary tenet of the forward guidance it introduced in August, that dip below 7 percent would be triggering a rise in official interest rates.

There's a lesson here for governments in the euro region whose commitment to economic discipline -- yes, I'm pointing at you, France -- is less than ardent.

In the coming days, the French government is scheduled to detail 50 billion euros ($69 billion) of spending cuts to be implemented in the next three years, as the nation attempts to cut its budget deficit. Finance minister Michel Sapin has ruled out tax increases to fill the hole; instead, another 11 billion euros of reductions in labor and corporate taxes are planned.

With the 2013 budget gap estimated to be 4.3 percent of gross domestic product, achieving the 3 percent limit next year looks like a tall order, making it increasingly likely France will have to ask the European Commission for more time. A deadline that moves -- France has already had a two-year reprieve -- isn't really a deadline.

The U.K. example suggests that it's better to take the medicine early. Britain's economy is growing at a 2.7 percent clip, compared with 0.8 percent in France; that U.K. unemployment rate compares with 10.2 percent in France. Moreover, forecasts compiled by Bloomberg News show U.K. growth of 2.8 percent this year, compared with just 1 percent in France.

French government spokesman Stephane Le Foll told listeners to RTL radio yesterday that there has to be a balance between deficit cutting and improving growth. He's right; the U.K. evidence, though, strongly suggests that getting the former right can deliver the latter.

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