The original Giavazzi and Pagano paper from 1990 highlighted Denmark’s expansionary contraction in the period 1982–1986, claiming a political regime shift to the right, plus devaluation, plus a peg to the deutsche mark promoted growth. They were also “tempted” to say that the same applied to Ireland. Five years later Alesina and Perotti found fourteen successful adjustments in twenty countries over thirty-two years, with positive shifts in investors’ expectations, cuts on the expenditure side, and devaluations doing the work. These cases were more thoroughly examined in their article “Tales of Fiscal Adjustment,” in which the twenty-three positive episodes discerned in the data were narrowed down to ten case studies, of which, the authors concluded, “two cases appear unambiguously expansionary: Ireland 1987–9 and Australia.” Denmark, Giavazzi and Pagano’s best case now appeared to be a “mixed” result. Alesina and Ardagna’s main point was that “regardless of the initial level of debt, a large fiscal adjustment that is expenditure based and accompanied by wage moderation and devaluation is expansionary.” The 2009 update of this paper found nine examples of expansionary fiscal adjustments, and in every case “successful fiscal adjustments are completely based upon spending cuts accompanied by modest tax cuts.” The key channel for expansionary austerity to work, across all the cases, is the rational expectations of consumers.

Mark Blyth, Austerity, loc. 559