Recovery for the PIGS?

Dan Mitchell

May 2

Just a few months ago, I wrote about Germany's fiscal decay.

Over the past eight years, government spending has grown much faster than the private sector, thus violating the Golden Rule of fiscal policy.

Given the shift to bad policy in Germany, I was very interested to see that the New York Times has a report by Liz Alderman and Melissa Eddy that explains how Germany no longer is the economic engine in Europe.

Here are some excerpts.

Something extraordinary is happening to the European economy: Southern nations that nearly broke up the euro currency bloc during the financial crisis in 2012 are growing faster than Germany... In a reversal of fortunes, the laggards have become leaders. Greece, Spain and Portugal grew in 2023 more than twice as fast as the eurozone average. Italy was not far behind. ...southern European countries made crucial changes that have attracted investors, revived growth and...reversed record-high unemployment. Governments cut red tape and corporate taxes to stimulate business and pushed through changes to their once-rigid labor markets, including making it easier for employers to hire and fire workers.

It's encouraging to read about some pro-market reforms in Southern Europe.

It's also encouraging that the New York Times seems to be acknowledging that free markets are the way to achieve more growth.

That being said, I'm not ready to declare that the PIGS (Portugal, Italy, Greece, and Spain) are the new role models for economic policy.

For instance, the NYT story is based on just one year of economic data. And I've warned that it is risky to draw big conclusions without seeing decades of evidence.

But a journey of a thousand miles begins with a first step. Given my interest in fiscal policy, I looked at the IMF data to see which countries have been most responsible over the past few years.

Lo and behold, Greece and Italy have been doing a decent job.

Three years of fiscal restraint may not seem like much, but it's worth noting that the burden of government spending in Greece has declined by more than 10 percentage points of GDP.

And the spending burden in Italy has been reduced by nearly 7 percentage points of GDP.

Keep that up for 5-10 more years, and those countries could become Switzerland.

Do it for 10-20 years, and they can become Singapore or Taiwan.