Austerity and Economic Growth

Concepts for Europe

The debate on austerity and its precise link to growth has been revived following the austerity plans that are being adopted by governments throughout Europe in response to pressures by EU institutions and the International Monetary Fund. Important and far-reaching questions arise regarding the nature of this link. Is there a tradeoff between austerity and long-run growth? Is a successful austerity program a precondition for sustainable long-run growth? Do adherence to strict austerity and the ensuing recession have permanent effects on the ability of a nation to get on a long-run growth path? Should all Eurozone countries adopt austerity programs simultaneously? What should be the consequences of failure to implement austerity? How do we optimally monitor the success of austerity programs and assess if austerity has gone too far? How can institutions be developed to minimize the negative effects of austerity and maximize the potential for long-term growth? How does austerity relate to the future of the Euro? What is the connection between austerity, migration, and growth prospects? How could the consequences of austerity on youth unemployment be minimized? What is the effect of austerity programs on expectations, risk taking, entrepreneurship and innovation? Are there alternatives to austerity programs when it comes to ensuring debt sustainability and country solvency?

In 2013, SAFE issued a call for projects on the topic “Austerity and Economic Growth: Concepts for Europe” with the objective to solicit proposals for research projects that examine the nature of the relationship between austerity, debt sustainability and growth. The authors of the projects, that were selected by a jury, presented their work at a conference in Frankfurt on 14 June 2014, published the results as a SAFE Working Paper and submitted them to a major journal. Also, the results of all projects were transferred to a policy publication following the conference.

The projects selected were:

  • Alberto Alesina (Harvard): “The composition of fiscal adjustments: A Proposal”
    – jointly with Carlo Favero (Bocconi) and Francesco Giavazzi (Bocconi)
    Working Paper
  • Gernot J. Müller (University of Bonn): “Does austerity pay off?”
    – jointly with Benjamin Born (University of Mannheim and CESifo) and Johannes Pfeifer (University of Mannheim)
    Working Paper
  • Harris Dellas (University of Bern): “Austerity and Default”
    – jointly with Dirk Niepelt (Study Center Gerzensee, University of Bern)
    Working Paper
  • Alan Taylor (University of California): “The Time for Austerity: Estimating the Average Treatment Effect of Fiscal Policy”
    – jointly with Òscar Jordà (Federal Reserve Bank of San Francisco and UC Davis)
    Working Paper
  • Linda Tesar (University of Michigan): “Costly Macroeconomic Tradeoffs of Maintaining Fiscal Solvency in European Economics”
    – jointly with Enrique G. Mendoza (University of Pennsylvania) and Jing Zhang (Federal Reserve Bank of Chicago)
    Working Paper

Selection Committee:

Costas Azariadis (Washington University), Roel Beetsma (Universiteit van Amsterdam), Henning Bohn (University of California at Santa Barbara), Athanasios Orphanides (MIT Sloan School of Management) and Alfons Weichenrieder (Goethe University & SAFE)