Foreign Policy Blogs

European Growth

The IMF has put forward a new paper on new International Evidence on Expansionary Austerity (which Krugman as well as Herdentrieb linked to). From the abstract:

This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine the historical record, including Budget Speeches and IMF documents, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP.

This is not a surprising result a priori of course, but it is quite shocking when considering what that means for European growth and unemployment in the years (decade?) to come. Virtually every major European economy’s government is currently trying to reign in spending because of self-induced limits (the German debt brake), political convictions (the UK and to a lesser degree France), or EU (some would argue: market) pressure (Portugal, Ireland, Spain, Greece, now: Italy).

In other words, the European South is looking at a contracting economic outlook which will exacerbate already existing high (youth) unemployment. Germany, reliant on its exports for strong growth, will barely (if at all) manage to increase its domestic consumption, which means that it a) won’t be able to economically help its southern European partners even while b) German dependency on growth in other parts of the world (the US, emerging nations but also the EU) will remain as high as ever. This gloomy prediction seems almost impossible to avoid for most European economies (the exception being some fast-developing eastern European economies such as Poland) and political consequences of this as regarding European integration, social policies, and social stability seem inevitable.