The appropriate timing of fiscal retrenchment is, in fact, difficult to decide.

But when the economy is booming, the effects of fiscal retrenchment are unlikely to be damaging.

The reasoning seems to be that growth requires market confidence, which in turn requires fiscal retrenchment.

To dampen the additional inflationary pressures implied by a weaker rupee, more aggressive fiscal retrenchment is needed.

At the same time, financial markets are forcing fiscal retrenchment on governments, as will the planned new fiscal treaty (on which Germany, among others, insisted).

Until the Reinhart Rogoff paper, the main argument for fiscal retrenchment rested on concerns about the sustainability of public debt.

On the supply side, permanently lower output makes fiscal adjustment even more compulsory but, on the demand side, a weak private economy lacks the resilience needed to weather fiscal retrenchment.

A shadow or actual International Monetary Fund program would vastly enhance the credibility of a policy of fiscal retrenchment and structural reforms.

Given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries.

The sharp fiscal retrenchment that has now started throughout southern Europe should contribute further to a sharp deceleration, if not outright fall, in domestic demand there.

If Germany wants the rest of Europe to swallow the bitter pill of fiscal retrenchment, it will eventually have to recognize the implicit quid pro quo.

A one dollar spending cut was believed to reduce GDP by more than one dollar, so that fiscal retrenchment was economically costly (while, conversely, stimulus was effective).

The traditional remedy for countries caught in the kind of crisis that Spain, Greece, Portugal, and Ireland find themselves in is to combine fiscal retrenchment with currency depreciation.

Slower fiscal retrenchment, space for investment in government budgets, growth friendly fiscal packages, and coordination of national policies with critical contributions from surplus countries can go a long way in helping Europe to overcome its crisis in the medium term.

Neglect of the private sector has left Europe in a sad quandary. On the supply side, permanently lower output makes fiscal adjustment even more compulsory but, on the demand side, a weak private economy lacks the resilience needed to weather fiscal retrenchment.

Although its pledge last August to purchase unlimited quantities of short term government debt has calmed markets, activation of the ECB s outright monetary transactions program is conditional on continued fiscal retrenchment.

The reasoning seems to be that growth requires market confidence, which in turn requires fiscal retrenchment. As Angela Merkel puts it, growth can t come at the price of high state budget deficits.

PARIS The dispute that has emerged in the United States and Europe between proponents of further government stimulus and advocates of fiscal retrenchment feels very much like a debate about economic history.

This, by contrast, implies a need for retrenchment.

True, fiscal retrenchment in Germany is more cautious than official rhetoric suggests. But, overall, the eurozone and Great Britain have clearly shifted towards austerity, which the US is still very reluctant to consider.

But when the economy is booming, the effects of fiscal retrenchment are unlikely to be damaging. So it was right to start planning for a change of gear when the recovery started to materialize.

Moreover, important developments that occurred between the 1929 stock market crisis and the 1937 fiscal retrenchment especially America s turn to protectionism in 1930 and the monetary turmoil of subsequent years have no analog today.

Because the private economy is now stronger, it may benefit from more auspicious growth conditions, but the magnitude of the fiscal retrenchment needed more than ten percentage points of GDP, according to the IMF is frightening.

Five years of economic retrenchment have deeply scarred the Palestinian economy.

To dampen the additional inflationary pressures implied by a weaker rupee, more aggressive fiscal retrenchment is needed. Even so, a depreciated rupee will increase the burden of repaying foreign debt, and deepen the woes of domestic companies and banks.

So the budget deficit will persist, and more retrenchment will be required.

How quickly fiscal retrenchment should be launched and the right balance between higher taxes and lower spending will vary by country, reflecting factors like the strength of the economic recovery, the market s appetite for debt, and initial spending and revenue ratios.

American consumers unprecedented retrenchment has turned the US economy s growth calculus inside out.

For starters, banks current retrenchment of long term investment financing is likely to persist.

Economic growth plummeted from 13 in 1936 to 6 in 1937, and GDP shrank 4.5 in 1938, while unemployment rose from 14 to roughly 20 . Although fiscal policy was not the only cause of the double dip, ill timed retrenchment certainly contributed to it.

After five years of decline in living standards, voters oppose more austerity and further retrenchment without growth.

Governments all over are being forced into premature fiscal retrenchment, even though unemployment remains very high and private demand shows few signs of life. Many are driven to undertake structural reforms that they don t really believe in just because it would look bad to markets to do otherwise.

Thus, the state s coffers (and hence spending) overflow during booms, but then collapse, forcing emergency retrenchment, during busts.

To be sure, retrenchment could entail some short term costs but the longer term benefits would be much bigger.

With retrenchment and balance sheet repair only in its early stages, the zombie like behavior of American consumers should persist.

But when there is spare capacity in the economy, the resources freed up by public sector retrenchment may simply be wasted.

Meanwhile, the state lurches from fiscal tragedy to fiscal farce.

After a period of massive expansion during which the financial services sector nearly doubled in size, some retrenchment is natural and normal.

Thus, Europe s failure to recover immediately has been due to a lack of austerity, even though public sector retrenchment has been unprecedented.

Fiscal consolidation was not, however, the result of formal fiscal rules.

They will warn that other EU countries like Portugal will refuse to undertake more reform, retrenchment, and repayment unless they receive similar largesse.

Fiscal Follies

Fiscal stimulus is turning into fiscal austerity and a drag on growth.

Europe s Fiscal Wormhole

America s Fiscal Isolationism