AUSTERITY
12 MYTHS EXPOSED
▻https://www.socialeurope.eu/wp-content/uploads/2019/02/Austerity-Print.pdf
Let’s start with the 3 percent deficit rule. The number was introduced by the French econ‐ omist Guy Abeille back in 1981. After his landslide elec‐ toral victory that year, the French Socialist president, François Mitterrand, was facing high expectations from cabinet members and the public—and a soaring deficit, which stood at 2.6 percent of GDP. He called upon a group of junior economists to come up with a number suitable to put a lid on the boiling pot, to stop the over‐ flow. Since it would have been hard to meet a 2 percent deficit target that year, due to the existing budget short‐ fall, the young expert at the Ministry of Finance suggested a limit of no more than 3 percent, which gave Mitterrand the fiscal cap he desired.
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Surely the 60 percent debt-to-GDP ratio was not founded on an ad hoc political rationality as with the 3 percent rule? Alas, as DCM Platt once quipped, it is a similar Mickey Mouse number in the history of statistics. The figure is based on neither thorough research nor excellent studies. It was simply invented as a reference point, much like the 3 percent rule, which would prepare the path for a monetary union focused on stability. According to the economist Luigi Pasinetti, the only reasonable explana‐ tion for choosing 60 percent was that it was the approxi‐ mate average debt-to-GDP ratio of the EU member states at the time of negotiation of the EMU. Both Germany and France were close to this mark too. Once established, the arbitrary calculation however provided the legitimacy for an apparently authoritative reference point, an authority only numbers can provide.
...and then we take the world—the political influence of the 90 percent argument
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With no scientifically-based rationality for an optimal debt-to-GDP ratio at hand and rapid movement away from the 60 percent ratio in the wrong direction, the shaky grounds on which the debt-to-GDP rationale had been built were laid bare. But rescue was coming from the ivory tower of sound economics, Harvard University and from the University of Maryland.
In 2010, Carmen Reinhart and Kenneth Rogoff published the non-peer-reviewed article ‘Growth in Time of Debt’, which provided the desperately-needed academic exper‐ tise on the issue of sustainable debt-to-GDP ratios and was soon cited widely. [...] This general myth of how austerity and a balanced budget lead to economic success had been debunked before and would not need to be so again, had it not exerted such a strong intellectual backing for the random Maastricht debt-to-GDP ratio.
