04 March 2013

Richard Wood: Periphery economies - National governments must be prepared to provide stimulus

This column argues that at some point soon, eurozone governments will be forced by voters to reverse austerity and stimulate growth. A number of policy options are available, but it is clear that pro-growth fiscal stimulus policies should take their place.

Conclusion

Macro-economic policy logic, recent statistical trends and the available forecasts highlighted in this article inexorably lead to the view that monetisation of the deficit may represent the optimal policy paradigm needed to simultaneously achieve economic growth and debt stabilisation. 

When real incomes are collapsing, when private demand is grossly deficient and falling, when interest rates are at record lows, when public debt is grossly excessive, when further deleveraging is required, when austerity policies have back-fired, and when monetary transmission mechanisms are partly dysfunctional, national governments are morally obliged to step up and provide fiscal support to stimulate aggregate demand to lower excessive unemployment.

Defensive monetary and fiscal policies cannot stabilise debt or restore economic growth. Furthermore, continued reliance on new bond financing of budget deficits will only compound and intensify current problems and raise public debt further. Continuation of these policies would drag economies downward and represent a further colossal policy blunder.

Based on the available statistical evidence and the logic in this column, austerity programmes should be wound back, with pro-growth fiscal stimulus policies taking their place. Longer-term fiscal consolidation will nonetheless also be required to reduce excessive levels of public spending and taxation relative to GDP, and to contribute to the reduction in public debt over time.

Full article

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