Spain is growing.

Photographer: Javier Soriano/AFP/Getty Images

Two Points for Austerity: Spain and Ireland

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Spain and Ireland now have the euro zone's most dynamic economies: The International Monetary Fund expects Spain to expand by 3.1 percent this year and Ireland, by 4 percent -- realistic expectations, in light of their progress in the first six months. Given this performance, one has to wonder how long any economists can continue to condemn austerity as deadly poison based on the example of Greece.

Spain grew 0.9 percent in the first quarter of 2015 and 1 percent in the second. Perhaps some of that can be attributed to an increase in tourists who prefer Spain to unstable Greece, but the first two quarters of the year are mostly low season. And the tourist argument works both ways: Spain is recovering, so people would rather travel there than to Greece. Besides, manufacturing, construction, wholesale and retail trade, and professional services all made positive contributions to first-quarter growth. 

Spain's gross domestic product isn't back to its peak -- it was bigger by five percentage points in the second quarter of 2008 -- but its growth rate has returned to pre-crisis levels. 

Austerity critics -- of whom the economist Paul Krugman is the most eloquent -- say all that is nonsense because of the country's persistently high unemployment rate and the social discontent that goes along with it. When anti-austerity parties triumphed in recent local elections, Krugman wrote: "Just the other day the Very Serious Europeans were hailing Spain as a great success story, a vindication of the whole program. Evidently the Spanish people don't agree."

Voters are sometimes wrong about the economy, however. Spanish unemployment, while still abnormally high, is on its way down. It approached 27 percent in 2013, but it's dropped to 22.4 percent in June. In the past three months, more than a percentage point has been shaved off. And the electoral performance of Podemos and other anti-establishment parties has been driven as much by corruption scandals in the ruling party as by any economic hardship. If Prime Minister Mariano Rajoy is swept out of power later this year, he will have only himself to blame for letting scandals overshadow the economic expansion.

The Krugman camp has also argued that Spain and Ireland, unlike Greece, haven't seen true austerity. From 2007 to 2014, Spain's non-interest government spending actually increased, and Ireland's fell by just 2 percent -- while Greece's plummeted by 22 percent. But such real spending changes don't really describe a country's effort to live within its means when its GDP shrinks like an improperly washed sweater. Public spending relative to GDP would be a better measure: 

Of the three countries, it was Ireland, not Greece, that saw its public spending diminish the most relative to the size of its economy. One could argue that austerity was what caused Greece's GDP to contract so painfully, but that argument would be purely ideological, because there's no way to accurately compare the effects of the countries' individual measures. Their economies are too different. It's just as easy to say -- and as hard to prove -- that governments' management aptitude or cultural factors were decisive.

As for statistics, they show that of the three countries, the one that lowered its public spending-to-GDP ratio the most got the best results: Ireland's economic output is back at its pre-crisis level, it's the fastest-growing economy in Europe, and its unemployment level is down to 9.7 percent from the 2012 peak of 15 percent. 

Krugman has dismissed these achievements, pointing out that unemployment dropped only because so many people left Ireland. Indeed, the Irish government has openly called on young people to seek jobs and other opportunities overseas, and in 2013, Ireland had Europe's highest net emigration rate -- even ahead of the Baltic states, those other austerity champions. "The repeated invocation of Ireland as a role model has gotten to be a sick joke," Krugman wrote

The reason the European Union has a common labor market, however, is to allow countries to let off economic pressure and help people find work when it gets scarce at home. There's nothing wrong with labor mobility as a valve for unemployment. The Baltics have used it to their advantage, and so has Ireland. Eventually, growth may lure people back -- or the workers abroad will spur growth elsewhere, and the Irish workforce will be just the size required for the country's economic potential. 

Austerity is not necessarily the reason Spain and Ireland are finally recovering. It may even have slowed them down at certain points. But the two countries' performance makes it hard to accept the view of another anti-austerity Nobel laureate, Joseph Stiglitz, who argued that cuts in government spending administered in crisis-hit European countries were "contractionary." The Spanish and Irish economies are growing despite stingier governments. Arguably, it makes them healthier than if they had had the opportunity to try to fix their problems by printing money.

Perhaps the much-hated Germans, with their austerity prescriptions and their balanced budget, were right about something, after all.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net