Fiscal Austerity Versus European Society

Fiscal austerity is a poor substitute.

Europe is mired in its oxymoronic commitment to expansionary fiscal austerity.

NEW YORK A wave of fiscal austerity is rushing over Europe and America.

But austerity undermines growth, worsening the government s fiscal position, or at least yielding less improvement than austerity s advocates promise.

So political constraints may prevent fiscal austerity and structural reforms from being implemented.

In particular, Germany demands more fiscal belt tightening from heavily indebted Southern European countries, whose unions (and voters) are rejecting further austerity.

As fiscal austerity means more recessionary and deflationary pressures in the short run, one would need more monetary stimulus to compensate and more domestic demand growth via delayed fiscal austerity in Germany. But the two biggest policy players in the eurozone the European Central Bank and the German government want no part of that agenda, hoping that a quarter of good GDP data makes a trend.

BERKELEY Fiscal profligacy did not cause the sovereign debt crisis engulfing Europe, and fiscal austerity will not solve it.

High public debt is also being invoked in support of fiscal austerity in many developed countries.

Though privatization plans lagged, the Greeks won high marks for doubling down on fiscal austerity.

But both have chosen fiscal austerity, all but ensuring that their economies transitions will be slow.

In exchange for this liquidity support, Greece will be forced to accept painful fiscal tightening and falling GDP.

US President Herbert Hoover s administration did not initially respond to the depression by emphasizing the need for fiscal austerity.

Second, the effects of austerity were exacerbated by the choice to pursue nominal, rather than structural, fiscal deficit targets.

And now, thanks to the fiscal compact, even the eurozone s core will be forced into front loaded recessionary austerity.

Similarly, some of the results reported by Reinhart and Rogoff have been used by politicians and others to justify fiscal austerity.

Moreover, the fiscal austerity they prescribe delays economic recovery.

By the same token, I cannot think of a single economy whose long term growth prospects were damaged by excessive fiscal stinginess.

But, this year, with signs of economic recovery emerging, advanced countries have quickly shifted from fiscal stimulus to fiscal consolidation.

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

Unfortunately, fiscal austerity and structural reforms are at least in the short run recessionary and deflationary. So other policies are needed to restore growth.

Unemployment was soaring, and austerity, rather than restoring fiscal balance, simply exacerbated the economic downturn.

Growth may be close to zero by the end of this year, as fiscal austerity kicks in and stock markets fall.

With fiscal austerity all the rage, they have given up ensuring that people can buy and industries can produce.

The first is between austerity and growth that is, short term deficit reduction and additional fiscal stimulus.

On this view, if fiscal austerity relieves households of the burden of future tax increases, they will increase their spending.

The Court added then that t his conclusion should not be taken as a direction to build an expensive courthouse at a time of fiscal restraint.

How is the possibility that a government might be forced into radical fiscal consolidation an argument for taking that step immediately, under no duress and before the recovery is well established?

BERKELEY Fiscal profligacy did not cause the sovereign debt crisis engulfing Europe, and fiscal austerity will not solve it. On the contrary, such austerity has aggravated the crisis and now threatens to bring down the euro and throw the global economy into another tailspin.

But fiscal austerity will envelop most advanced economies this year, rather than just the eurozone periphery and the United Kingdom.

Italy, for example, would save up to 4 of its GDP its budget would move into surplus and fiscal stimulus would replace austerity.

The Greek, Portuguese, Irish, and Italian economies are reeling under fiscal austerity with budget cuts and higher taxes as far as the eye can see.

Moreover, as the recession deepens, resulting in even wider fiscal deficits, another round of austerity will be needed.

First, we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output.

Lowering private and public consumption in order to boost private savings, and implementing fiscal austerity to reduce private and public debts, aren t options, either.

In 2013, downside risks to global growth will be exacerbated by the spread of fiscal austerity to most advanced economies. Until now, the recessionary fiscal drag has been concentrated in the eurozone periphery and the UK.

The severity of Europe s economic downturn, deficiencies in the euro s design, and ill conceived fiscal austerity measures are all fueling the exodus.

For all of them, what matters is that the sorry fate of the Reinhart Rogoff paper undermines the case for fiscal austerity.

Fiscal austerity in the periphery requires cutting back on imports hence, the countries exporting to the periphery need to curtail their own imports and so the process cascades.

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.

While the right medicine needed to avoid fiscal train wrecks is well known, the main constraint to fiscal consolidation and discipline is that weak governments around the world lack the political power and willingness to implement austerity.

So, if countries in the eurozone s periphery are forced to undertake fiscal austerity, countries able to provide short term stimulus should do so and postpone their own austerity efforts.

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

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.