An influential paper written by American economists Carmen Reinhart and Kenneth Rogoff made the headlines last week as several mathematical flaws in the influential work seemed to discredit the main arguments used by politicians to defend their harsh austerity policies.
The two Harvard economists published a working paper “Growth in a time of debt” in 2010. Its main message was that above a public debt ratio of 90%, GDP growth will decline rapidly. The paper has become the justification for the IMF and EU leaders to focus their anti-crisis efforts on austerity and structural reforms.
But in a new study, "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff," Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts found that the working paper had quite a few biases and miscalculations. (For a good description of the mistakes in the Reinhart-Rogoff paper, see this contribution on the Next New Deal blog of the Roosevelt Institute). When these are corrected, the claim that high levels of debt are associated with declining growth no longer stands up.
The controversy over this paper comes at a time when EU leaders are already under considerable pressure over their austerity course. Social unrest in those countries particularly hit by the Troika as well as the recent U-turn of the IMF on the negative growth impact of austerity, has seriously weakened the dominating narrative of the “austerians”.
On Monday 22 April, Commission President Barroso admitted that “Europe may have hit the political limits of how far it can go with austerity-led economic policies because of the growing opposition in the eurozone’s recession-hit periphery” (source: Financial Times).
Martin Myant, Head of the ETUI’s Unit European Economic, Employment and Social Policy commented on the impact of the Reinhart-Rogoff controversy: “Bad research was quoted to back the Commission’s austerity policies. I doubt whether they will change course as a result of the debunking of the Reinhart-Rogoff paper alone, but it should by now be clear that their austerity medicine has no serious scientific justification, is bringing no positive benefits and is creating big divergences between countries and social groups as demonstrated in the ETUI’s latest Benchmarking Working Europe.”
New figures on deficits and debt levels of EU member states released by Eurostat on 22 April clearly showed that the debt of the EU as a whole and of most of the austerity-hit countries is still increasing. The overall debt of the 17 eurozone countries rose from 8.2 trillion euros ($10.7 trillion) to 8.6 trillion euros.
Steffen Lehndorff (Senior Researcher at the Working Time and Work Organisation Department at IAQ, University of Duisburg-Essen)
David Coats (Research Fellow, The Smith Institute, London)