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Spending creates growth, austerity does not

Spending creates growth, austerity does not

Some brief notes on the simple reasons behind the high economic growth in the United States and the European recession. We are beginning to notice how all the models confirm that only the United States has managed to resume its pre-Covid-19 growth path, while other Western countries, from Canada to the Eurozone to the United Kingdom, are still some distance behind. . The chart was provided by Martin AnotaAnd it’s very clear:

The problem is clear: since the Covid crisis, European economies have lost the pace of American growth. Canada and the United Kingdom also lag behind. This creates political problems: if Biden is not sure he will win the election, Sunak is almost certain he will be defeated, and Europe is likely to see some changes as well.

But let’s keep going, he points out François de la SoireeThis development is highlighted very well by the dynamism of the economy, which is measured by the opening of new economic activities.

If before 2016 European dynamism was superior to American dynamism and the two values ​​went together from 2017 to 2019, the difference after Covid was enormous, with the United States which, even if it was up and down, still showed unimaginable vitality for Europe.

What is the reason for this big difference? There are certainly factors such as increased American entrepreneurship or the greater simplicity of the North American economic system compared to European bureaucracy.

In fact, the explanation is much simpler: the United States runs a larger public deficit, so it spends more, taxes less, and continues to provide constant stimulus to the economy. The chart below, which compares the US budget, or rather the Eurozone deficit, and the US federal budget:

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The United States has always had a higher federal deficit than its eurozone counterpart, but this difference increased during the Covid period, when there was the greatest difference between US and European growth, and in 2023 this difference widened again.

This means that US deficit-financed government spending is fueling more growth, while European austerity is fueling nothing. Things will become clearer if the European budget rules required by the recently reinstated Stability Pact are implemented, which would lead to further cuts in public spending.

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