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Justin Trudeau understands that timing is crucial to austerity

Canada is once again showing the world that there is a right time to launch austerity, and a wrong time. The Europeans got it dead wrong and, seven years after the financial crisis, they are still paying for their epic miscalculation. The Canadians would have continued to make the same mistake if they had voted in a Conservative or NDP government. Who would have thought that Justin Trudeau has spared Canada from a dose of austerity that would have backfired?

Mr. Trudeau, the next prime minister, scored a landslide victory in Monday's election by exploiting the virulently anti-Stephen Harper sentiment that had permeated Canadian society. But his position on the economy helped him enormously.

The NDP, which was running in first place at the start of the election, decided to mimic the budget-crunching Harperites and campaign for balanced budgets. NDP leader Tom Mulcair accused the Liberals of being "fiscally irresponsible," a ruinous move on his part. NDP support evaporated as the Liberals emerged as the genuine progressive party.

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Mr. Trudeau's vowed to run deficit budgets for three years to stimulate the ailing economy. The focus of the Liberals' economic plan was fairly modest amounts of spending – up to $5-billion a year – on infrastructure from roads and bridges to flood-control systems and seniors' homes. Mr. Trudeau argued that the timing was perfect to pry open the spending spigots. With interest rates at historic lows, borrowing couldn't get any cheaper. Even if it were not money for nothing, overhauling infrastructure is never a bad idea, and Canada certainly needs it. The return on investment is generally positive; such spending makes any economy more productive.

Voters bought into Liberals' economic plan, which Mr. Harper, in the dying days of his dying campaign, surrounded by clapped-out politicians such as Toronto's Ford brothers, denounced as all "unicorns and rainbows." It didn't work. The election killed Harper-style austerity.

If only the Europeans had learned from Canada's austerity lessons.

Canada did not invent austerity economics, but the Liberals at least seem to know when to apply it and when not to. Austerity programs are typically a blend of spending cuts and tax hikes designed to drag budgets into balance – they yank stimulus out of the economy. As a few smart Canadian economists, among them Marshall Auerback, a director of Economists for Peace and Security, and Louis-Philippe Rochon of Laurentian University, have argued, austerity doesn't work when an economy is in retreat. Waning government spending on top of waning private spending only sucks the oxygen out of an already weak economy. When an economy is in recession, austerity deepens it. This is Keynesian Economics 101.

Applied at the right time, austerity can work marvels. That's what happened in Canada in the 1990s, when then-finance minister Paul Martin swung the meat cleaver at the federal budget and its monstrous deficits. The effort was made less bloody by a rising economy and a healthy private sector, thanks to surging exports to the United States, where the Americans were happily gorging on debt to buy Canadian products and commodities, from natural gas to cars. The low C-buck helped.

Shortly after the debt crisis threatened to rip the euro zone apart, in 2010, Mr. Martin informally advised some European governments on implementing deficit-reduction programs without triggering social unrest. We can guess that he argued against slash-and-burn budget campaigns.

Too bad no one listened. Most of Europe went into deep recession, Britain included, but none worse than Greece and Spain. On and off for years, Greece was paralyzed by strikes, violent protests and revolving-door governments as unemployment and poverty rates soared and the economy shrank by a quarter. Greece is still in recession, with unemployment at 25 per cent.

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Yet Spain is now growing at about 3 per cent – the fastest rate among the euro zone countries – apparently undermining the notion that austerity measures do more good than harm. The reality is somewhat less convenient for blood-thirsty austerity fans; Spain is bouncing back in good part because the election-bound government has eased off the austerity throttle. Spain's new austerity-lite is bad news for Podemos, the upstart party that, like Syriza in Greece, had leveraged its strong anti-austerity stance into a poll-leading position. Podemos's popularity is now fading fast.

Mr. Trudeau saw through the austerity propaganda, delivering the message that effective and socially responsible economic policy does not start and stop with balanced budgets. The NDP utterly failed to recognize that the mindless pursuit of balanced budgets would be counterproductive in a sluggish economy. The NDP also failed to recognize why austerity worked in Canada in the 1990s and why it could not work now. For that, it was slaughtered in the polls.

Justin Trudeau is off to a good start on the economy file. His good sense may not last, but at least he has proven that he had the insight and guts to break with nonsensical economic orthodoxy.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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