Mazzolini, G. & Mody, A. (2014) “Austerity Tales: the Netherlands and Italy“, Bruegel Think Tank, 03 Οκτωβρίου.
The analysis in this article warns that the deflation is likely to be a country-specific phenomenon, requiring counter measures at the country level
In 2008 and early-2009, most euro area countries joined in an internationally-coordinated stimulus of the global economy to ward off the menacing crisis. But by late-2009, especially after the Greek fiscal hole was revealed in October, the focus shifted to reducing public debt. This shift was encouraged by the global economy’s brief display of economic strength in 2010, which lulled policymakers everywhere into believing that the crisis was largely over. Since then, the euro area countries have single-mindedly pursued the objective of debt reduction.
There was reason to be concerned about the rapid increase in euro area public debt. But the policy pursued had serious unforeseen consequences. This article documents the unusually severe and persistent austerity, which has yet to make a dent in the debt burdens but has slowed growth and created deflationary tendencies. The emerging link between frustrated debt reduction efforts and deflation in the most stressed economies is particularly worrisome. Specifically, we find:
- Even making allowance for their high public debt-to-GDP ratios, euro area countries adopted significantly greater austerity than on average in other advanced economies.
- The austerity response within the euro area was remarkably similar across countries: Netherlands (with a relatively low public debt ratio) and Italy (with a high ratio) responded with equal aggressiveness.
- Because austerity caused growth rates to fall, public debt ratios today are much higher than in 2010 and private debt ratios are no lower.
- Public debt ratios have not only increased but they have exceeded forecasts. The higher-than-projected debt ratios have gone hand-in-hand with lower-than-projected inflation, highlighting the operation of a country-specific debt-deflation cycle. As an incomplete monetary union, the eurozone has no tools to deal with such country-specific pathologies.
Even within the eurozone’s operational constraints, the outcomes could have been better. Our findings reflect the balance in the deployment of macroeconomic management tools. In the euro area, the most proactive tool for addressing the crisis was fiscal policy pursued under the framework of the Stability and Growth Pact (the SGP). The unwavering commitment to fiscal austerity—despite its adverse growth consequences—arose from a “wait-and-watch” approach in the use of other macroeconomic policy instruments. Unlike their counterparts in the United States and the United Kingdom, the euro area authorities have remained unwilling to use monetary policy aggressively to provide economic stimulus—indeed, interest rates were raised at moments of critical weakness. And there has been only token effort—restricted to the most egregious cases—in dealing with unviable banks. Moreover, the euro area does not have well-developed systems to address household and personal financial distress (Clayes, Darvas and Wolff, 2014). Thus, despite occasional calls to make it more “flexible,” the traditional SGP emphasis on the perceived vulnerability arising from high public debt and the emphasis on deficit reduction have had long-lasting, possibly irreversible, effects.
Σχετικές αναρτήσεις:
- Stiglitz, J. (2014) “Europe’s Austerity Disaster“, Social Europe Journal, 29 Σεπτεμβρίου.
- Meyer, H. (2014) “Why European Progressives Stick To Austerity“, Social Europe Journal, 01 Σεπτεμβρίου.
- Ladi, S. & Tsarouhas, D. (2014) “The Politics of Austerity and Public Policy Reform in the EU, Political Studies Review, 12: 171–180.