Austerity Still Not Expansionary

Michael Stephens | October 31, 2011

At Eurointelligence, Rob Parenteau digs into a recently-leaked “Troika” (the IMF, European Central Bank, and European Commission) document that discusses the outlines of a Greek debt restructuring deal.  Among the revelations Parenteau extracts from the document is evidence of a growing willingness to concede that fiscal consolidation is not expansionary.  As Parenteau comments:

In 2009 and 2010, citizens across the eurozone were sold large, multi-year tax hikes and government spending cuts on the idea that [expansionary fiscal consolidations] are commonplace and achievable, and besides, balanced fiscal budgets are a sign of prudence and moral purity. In fact, a closer inspection of history suggests fiscal consolidation will tend to be expansionary only under fairly special conditions, namely when accompanied by a) a fall in the exchange rate that improves the contribution of foreign trade to economic growth, and b) a fall in interest rate levels that improves interest rate sensitive spending by households and firms.

Notice that neither of these special conditions are automatic, and neither of them have been present in the eurozone of late.

Read the whole article, including a link to the leaked document, here.


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