Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Budget austerity does not necessarily mean political suicide

Finally, some good news for embattled European governments. Taking the axe to the civil service and cutting generous but popular social benefits does not necessarily lead to electoral suicide. So says a group of three academics led by Harvard’s Alberto Alesina.

With a growing number of European governments resigned to slashing spending and hiking taxes to avoid following Greece towards the abyss, Alesina and graduate students from Berkley and NYU looked at data for western European countries going back to 1975 to see if politicians really need to be spending as many sleepless night as they surely are. They conclude:

The bottom line is that it is possible for fiscally responsible governments to engage in large fiscal adjustments and survive politically. Moreover, acting on the spending side is no more costly that doing on the tax side. A sense of urgency because of impending crisis, a bit of time between the adjustment and the next election, good communication with the public, are ingredients that help.

That turns the conventional wisdom on its head. In perhaps the most recent example that the researchers are right that fiscal austerity is not political suicide, Czech voters voted in a coalition last weekend whose top priority is to restore the health of the public finances. Voters also punished the Social Democrats, whose promises to keep up high levels spending on costly social programs inspired not only mistrust but even voter anger, we are told by sources on the ground.

In those halcyon days before the financial crisis, Luxembourg premier and finance minister Jean-Claude Juncker once famously remarked about structural reforms that European governments knew what they needed to do but if ever they did then they would never hold office again after the next election. It’s a shame that the conventional wisdom did not get turned on its head before the crisis because they would be in a lot less pain now that they have no choice.




Disclosure: No positions