What does the now sustained recovery in the UK and the still tentative signs of recovery in the eurozone tell us? According to some on the right, it says all is good in the world, austerity has been successful and we need to stay the course. According to some on the left, the recovery is not real, and anyway it is all because there are more people, or because of a house price bubble.
First austerity. As I have said many times, the current recovery tells us nothing about austerity. In the UK austerity helped delay the recovery by three years. We can argue about how much of the stagnation of 2011 and 2012 was due to UK austerity and how much to the eurozone (austerity somewhere else), but no serious economist would argue with the statement that both played a significant part in delaying the recovery.
In the eurozone, austerity helped create a second recession. Here we can argue about the relative contributions of fiscal policy and inept monetary policy, but again no serious economist would disagree that austerity played a major role. Some estimates suggest eurozone GDP was around 4% lower in 2013 as a result of efforts to reduce deficits, and this restrictive fiscal policy was not confined to the periphery.
In the UK, austerity was put on hold in 2012 and 2013, which helped allow the recovery in 2013. But suspending austerity did not create the recovery, which was mainly down to lower consumer saving. This reduction in saving may have happened anyway, but both Funding for Lending and Help to Buy will have lent a helping hand. In the eurozone austerity has continued. That will be a drag on growth, but it alone is not enough to prevent a recovery as consumers rebalance and monetary conditions in periphery countries ease a little.
Political games
What about the counter argument that the recovery is not real, or not sustainable? In some ways this rhetoric is worse than the “austerity works†line: it is also wrong, but it is much less likely to succeed. The fact that growth in output per person (GDP per capita) is less impressive that GDP growth alone does not detract from the recovery because, in a demand-led recession, population growth does not automatically cause GDP growth. Recoveries are often led by consumers, but as long as investment follows on and average incomes begin to rise then a recovery will become sustainable. The rhetoric will not work because, despite the unequal and uneven nature of the recovery, many people do feel more optimistic now than two years ago.
