Dawn Holland, Jonathan Portes 01 November 2012
EU governments have individually embraced severe austerity programmes in an effort to avoid becoming the next Portugal. This column presents results from the National Institute Global Econometric Model suggesting that these individually rational polices are leading to collective folly. Keynes’ 'paradox of thrift' is in full swing since EU nations continue to act like small open economies while in fact they are a large closed economy.
Is austerity – particularly the fiscal consolidation programmes currently under way in most EU countries – self-defeating? DeLong and Summers (2012) have argued that, in current economic circumstances, the negative impact of fiscal consolidation on growth may be so great that the impact on debt-GDP ratios will be perverse, causing them to rise rather than fall.
Eurozone crisis, paradox of thrift, self-defeating austerity