Fiscal consolidation: Too much of a good thing?
John Van Reenen 27 April 2012
Many policymakers in Europe seem to stick to the idea that fiscal consolidation might inspire confidence and help the economy to grow. This column argues these sentiments may be understandable but are basically wrong. For countries like the UK where borrowing is relatively cheap and sovereign default unlikely, slowing down the pace of fiscal consolidation would be a rational response. The obsession over the fiscal stance is a distraction from sustainable long-run growth.
This week’s political events in the Netherlands and France which look likely to lead to government dissolution, have been interpreted as a set-back for the pace of fiscal consolidation in Europe with popular resentment punishing incumbent leaders (“Leaders in Austerity Backlash” was the headline of the Financial Times on 24 April 2012). The response of the European economic establishment has been to stay the course.
eurozone, fiscal consolidation, Bond market, austerity
Divergence of fortunes in recoveries
Prakash Loungani, M Ayhan Kose, Marco E Terrones 24 April 2012
How different is the current recovery from past ones? How do prospects differ between advanced and emerging economies? This column argues that the ongoing recovery in advanced economies has so far paralleled the weak and protracted recovery following the 1991 global recession to a surprising degree, partly because of challenges in Europe. In contrast, the recovery in emerging market economies has been unusually strong.
The last global recession was the deepest of the four recessions the world has experienced since World War II. Each recession led to fears of economic apocalypse but the global economy recovered in a year or two. Because of the depth of the last recession, some analysts worried that the world would relive the Great Depression of the 1930s. Luckily, and through significant policy actions, the global economy has been on a path of recovery over the past three years, but still suffering from the legacies of the crisis.
eurozone, emerging markets, recovery
Fiscal austerity and policy credibility
Marco Buti, Lucio R Pench 20 April 2012
Most economists agree that European economies share the need to reduce public deficits and debts. This column stresses that while gradual consolidations are in general more likely to succeed than cold-shower ones, the superiority of a gradual strategy tends to evaporate for high levels of debt and is also less pronounced for consolidation episodes following a financial crisis.
The renewed phase of tension in Europe, and the Eurozone in particular, since the second half of 2011, with the prospect of a double-dip recession alternating with that of a sovereign-debt crisis, has reignited the debate on fiscal austerity, to which European governments have been committed since the end of the most acute phase of the crisis in 2009.
EU policies Macroeconomic policy
eurozone, fiscal policy, austerity
Is the euro rescue succeeding? An update
Uri Dadush, Zaahira Wyne 20 April 2012
The current gyrations of sentiment over government-bond spreads in the Eurozone are generating much commentary. Yet this column argues they are diverting attention from the real issue – the Eurozone periphery needs a big realignment towards the tradable sector to reignite growth sustainably. It adds that EU policies have made little progress, casting doubt on whether the adjustment can succeed.
The current gyrations of sentiment over government-bond spreads are diverting attention from the real issue – the Eurozone periphery needs a big realignment towards the tradable sector to reignite growth sustainably.
EU policies Exchange rates Macroeconomic policy
eurozone, Eurozone crisis, real exchange rates
Too early to sound the alarm
Manfred J M Neumann 17 April 2012
Debt finance of public consumption has clearly gone too far in several countries, reaching the borderline of sustainability. Have austerity measures now gone too far as well? This column argues it seems too early to sound the alarm. First, the global economy is likely to grow by 3.3 % this year, and second, reversing the fiscal stance or exiting the euro are worse options than austerity.
Debt finance of public consumption has clearly gone too far in several countries. Too far in the sense that it has reached if not exceeded the borderline of sustainability. Have austerity measures meanwhile gone too far, too?
EU policies Macroeconomic policy
eurozone, fiscal policy, austerity
The EZ breakup contest: Take ignorance seriously
Richard Baldwin 10 April 2012
The five finalists of the £250,000 EZ breakup contest were announced last week; only one has a graduate degree in economics. This column argues that three are amateurish efforts full of economic and factual errors. European economists should take such ignorance seriously. Failure to do so in the US allowed odious ideas to gain respectability.
The Eurozone might not survive in its current form. Buiter and Rahbari (2012) put a likelihood of 50% on Greek exit – an event that would be something between an historic event and a global economic catastrophe (depending on how it was handled).
Europe needs planning to reduce the disruption arising from possible EZ exits. To do the job right, the planners will need to be experts on:
eurozone, EZ breakup contest, Greek exit
The problems of European monetary union – asymmetric shocks or asymmetric behaviour?
Andrea Boltho, Wendy Carlin 31 March 2012
Divergent behaviour from Eurozone countries that have very different economic, social, and political structures is threatening the existence of the single currency. This column argues that the Eurozone is a fragile bureaucratic creation that has hardly ever raised much popular enthusiasm anywhere. If behaviour across the area remains as asymmetric as it has been over the last decade or so, the project could run into even stronger headwinds in the long run.
Much of the literature that was sceptical of the prospective success of the euro feared the effects of Mundellian asymmetric shocks on an area which (unlike the US) had little inter-country labour mobility and no common fiscal policy. Early research, for instance, pointed out that Europe’s periphery, in particular, had suffered from large idiosyncratic shocks in comparison to Europe’s core, let alone to US regions (Bayoumi and Eichengreen 1992). This, many felt, could create difficulties for the operation of a monetary union.
Europe's nations and regions
eurozone, growth, governance
From a vicious to a virtuous circle in the Eurozone - the time is ripe
Marco Buti, Pier Carlo Padoan 27 March 2012
The economic and financial crisis in the Eurozone is in its fourth year. This column argues that, by providing a confidence bridge, decisive and credible policy action can turn the economy around and bring it towards a good equilibrium of debt sustainability and sustainable growth.
The economic and financial crisis in the Eurozone is in its fourth year. In late 2011, it had evolved dangerously into a vicious circle of sluggish growth, tensions in sovereign debt markets and banking sector fragility. Investor confidence in the Eurozone seemed on the verge of collapse, many sovereigns and banks struggled to access market funding and the future of the Eurozone was widely questioned in financial markets and the policy debate.
eurozone, growth, fiscal consolidation
Fiscal consolidations for debt-to-GDP ratio containment? Maybe … but with much care
Gianluca Cafiso, Roberto Cellini 20 March 2012
As fiscal-consolidation policies are being implemented across the EU, a debate has been developing concerning the effects of such policies on the dynamics of the debt-to-GDP ratio. This column examines past episodes and finds that following fiscal adjustment may have favourable effects in the short term but that the two-year cumulated changes have been mainly adverse.
In recent time a wide debate has been developing concerning the effects of restrictive fiscal policies on the dynamics of the debt-to-GDP ratio (eg Corsetti and Müller 2012). The debate is nourished by the current experience of EU countries, where fiscal-consolidation policies are implemented.
eurozone, debt, austerity