Effectiveness of austerity measures and the role of Keynesian demand management: Slovenia

Authors assess the effectiveness of austerity measures that have been implemented since the spring of 2012 by the Slovenian government based on the recommendations of the European Commission. They illustrate how the adopted austerity measures prevent the effects of Keynesian demand management policies that were partly implemented in the 2008-2011 period. They do so by discussing the theoretical foundation of austerity and the Keynesian criticism of austerity measures. The main criterion they use to assess the effectiveness of adopted economic policy measures is their ability to positively impact economic growth of Slovenia and reduce its debt-to-GDP ratio.        

Authors demonstrate by combining both theoretical models and empirical evidence why the implemented austerity measures failed to restore Slovenia’s economic growth and reduce the share of its debt in GDP. When authors investigate the decline of economic growth the empirical analysis of the crowding out the effect of public deficit, the Ricardian equivalence principle and the domestic competitiveness effect are used. When analysing the public sector policy the authors use empirical evidence to demonstrate the false use of fiscal multiplier effects. When empirically investigating the failure of the Slovenian government to reduce debt, the authors take into consideration Pasinetti’s conclusions regarding the costs of incurring debt and economic growth. The authors base their assessment of the relationship between austerity measures and the possibility to use Keynesian demand management policies on Post Keynesian economics.  

The empirical analysis reveals that in Slovenia the implemented austerity measures were unsuccessful in creating conditions for economic growth. Moreover, the authors note that the implemented austerity measures were predestined to fail in creating such conditions because they were designed by ignoring the circumstances that developed before 2008 when the Slovenian economy underwent the phase of economic overheating that resulted in notable indebtedness of the private sector. The authors further determine that the policies introduced in the fields of public spending and the public sector in the spring of 2012 stopped the recovery of the Slovenian economy that was beginning to occur as a result of the economic policies implemented in 2008. At the same time they explain how, in circumstances where private sector investment lags behind savings due to needed reductions in indebtedness and where lowered competiveness of the Slovenian economy inhibits export growth, the implemented austerity measures are creating a pro-cyclical economic policy that should be replaced by an appropriate Keynesian demand management policy.