Is Greece really a better fiscal steward than Germany and the United States?

Yes, Greece has more prudent budget management than Germany and the United States, at least according to an analysis offering another reminder that when it comes to debt, context counts and prudent is a very malleable word.

Greece is, of course, mired in a debt repayment crisis and recession, while the United States works to stabilize and out-grow its high debt load and the notoriously geizig Germans are the fiscal scolds of Europe. At first glance, you wouldn’t think that the first country is doing a better job than the last two.

However, the International Monetary Fund has released a new working paper (pdf) assessing the fiscal responsibility of 42 different countries around the world, dating back to 1919 and in some cases even further, in one of the most comprehensive global fiscal assessments ever undertaken. The IMF’s methodology is complex, but in essence it’s testing to see which governments attempt to cut their deficits when their public debt increases relative to the size of their economy, and giving each one a score for how close they come to that ideal. It’s important to remember that this isn’t always a reflection of policymakers’ decisions, and that wars, recession, rapid expansion, and other external factors are also at play.

The most prudent countries, by this standard, are Norway, South Korea, Turkey, Denmark and Ireland. The presence of Scandinavian countries is no surprise, nor fast-growing and relatively recent IMF client South Korea. Turkey, too, has gone through several fiscal consolidations since the 1990s. Ireland’s presence might surprise you, given its current debt travails, but its attempt to counter-act a rising debt load with austerity has kept it in the high performing list.

The least prudent countries surveyed are Honduras, Israel, Costa Rica, Japan, and the United States. While Japan’s steadily increasing public debt isn’t news, and Honduras, Israel and Costa Rica still have relatively low debt-to-GDP ratios, the most interesting case here is the US, which maintains a fairly sterling prudence record from 1950 up until 2008.

What happened in 2008, of course, was the financial crisis and US efforts to us deficit spending to avoid a recession. It’s worth noting that the IMF paper keeps track of episodes of profligacy and prudence, and the only other time of significant profligacy was from 1934-6. That was right in the middle of President Franklin Roosevelt’s Great Depression-fighting spending binge. Excepting the last few years, the US has had a fairly prudent fiscal policy by these definitions. Many economists would argue that America’s financial crisis deficits were prudent as well, but that hypothesis remains to be tested.

Which brings us to Greece, which rates higher than the United States under this method. The paper’s authors, probably as surprised by the Greece result as you are, note that their analysis may be skewed by large budget surpluses the country maintained in the early nineties even as its debt continued to increase; the authors suggest that the Greeks planned for surpluses that never came, putting them in their current tight spot.

But the countries to be really worried about, they suggest, are France and Japan. Unlike other advanced economies with high debt loads, which have had bursts or even long periods of prudence in the last half-century, those two have consistently failed to reduce deficits in the face of increasing debt. Pakistan, too, stands out as a country on a long binge of profligacy, supporting the anxiety of those who have been nervous about a potential default in recent years.

But the conflicts between some of the results of this research and the events in the real world suggest that a better understanding of what to do about big debt loads is needed.

The issue is timing; fiscal consolidation to reduce debt can be an economically healthy move, but it needs to be supported by other sources of growth to avoid recession. Ireland and Greece both have high fiscal prudence scores because they adopted austerity policies, but neither is seeing much prosperity return to their shores, largely because their participation in Europe’s currency union restricts their access to monetary stimulus and exports. Meanwhile, the US and Japan have high debt and low prudence scores, but both countries will see more economic growth in the years to come—unless they run into the catastrophic debt crises some are predicting.

A big experiment in the coming years is what the advanced economies will do about their debt loads. The US seems intent on a steady path of fiscal consolidation; France is slowly and reluctantly coming to the same conclusion; while Japan’s new prime minister is taking an altogether bolder path to jump-start his country’s economy with a barrage of spending supported by a generous central bank. Depending on the results of these decisions—and the austerity experiments in Greece and the United Kingdom—we’ll have a better idea of what prudent really means.