azizonomics.com / By John Aziz / January 8, 2013
Anders Aslund of the Peterson Institute is fairly certain that austerity during depressions works:
After five years of financial crisis, the European record is in: Northern Europe is sound, thanks to austerity, while southern Europe is hurting because of half- hearted austerity or, worse, fiscal stimulus. The predominant Keynesian thinking has been tested, and it has failed spectacularly.
The starkest contrasts are Latvia and Greece, two small countries hit the worst by the crisis. They have pursued different policies, Latvia strict austerity, and Greece late and limited austerity. Latvia saw a sharp gross domestic product decline of 24 percent for two years, which was caused by an almost complete liquidity freeze in 2008. This necessitated the austerity that followed.
Yet Latvia’s economy grew by 5.5 percent in 2011, and in 2012 it probably expanded by 5.3 percent, the highest growth in Europe, with a budget deficit of only 1.5 percent of GDP. Meanwhile, Greece will suffer from at least seven meager years, having endured five years of recession already. So far, its GDP has fallen by 18 percent. In 2008 and 2009, the financial crisis actually looked far worse in Latvia than Greece, but then they chose opposite policies. The lessons are clear.
The notion that Latvia is somehow a success story is just absurd. Latvia has shed some ten percent of its workforce during the economic turmoil — that would be like more than 20 million people emigrating out of the USA, or 4 million people emigrating from Britain. This is why the unemployment rate has fallen somewhat. And Latvia’s economy is still deeply depressed, far, far below its pre-crisis peak. Would we be calling Britain and America success stories if millions and millions of people were leaving and output was still far, far, far below its pre-crisis peak?
This video from last year shreds the notion of Latvia as some kind of austerity-driven paradise: