Eurozone Austerity Policies Versus Deficit Growth Policies

Topics: Public finance, Keynesian economics, Monetary policy Pages: 2 (753 words) Published: March 27, 2013
Q1:Between the insistence on austerity versus deficit increasing growth policies in the Eurozone, which do you consider the most relevant and why?

Europe is trapped in a vicious cycle of high unemployment, financial sector fragility, heightened sovereign risks, fiscal austerity and low growth. According to an annual UN report published on 17 January 2013, the austerity policies throughout the industrialized world will not keep the economy from slipping back into recession. The Eurozone debt crisis has slowed external demand and high oil process has continued to depress Europe. “The euro area is in recession and the Gross Domestic Product (GDP) of the region is expected to reach only 0.3 per cent growth in 2013, strengthening marginally to 1.4 per cent in 2014,” according to a press release [1] announcing the World Economic Situation and Prospects 2013, produced by the UN Department of Economic and Social Development (DESA), the UN Conference for Trade and Development (UNCTAD) and UN regional commissions. Report says: "Consumption is expected to remain weak in the outlook, but with significant differences across the region. Austerity programmes depress consumption but vary in intensity across countries." I would argue from one point that fiscal consolidation creates a downward spiral, where falling demand and employment trigger declining tax revenues and budget deficits actually get worse. Further spending cuts or tax increases only worsen the downward spiral. In current Eurozone, deficit expansionary fiscal policy maybe more relevant. Below are the explanations. As we learned from the book (David Moss – Chapter III – expectations), Keynes viewed expansionary fiscal policy fundamentally as a coordination device. If expectations of future demand were gloomy, government could spend more than it received in taxes and thus running a large budget deficit. As consumers saw the government aggressively creating new demand (by buying goods and services itself), their...

References: [1] World Economic Situation and Prospects 2013
[2] The Eurozone: A Moral-Hazard Morass
[3] The Bundesbank (2011a, p. 11) in its monthly report argues implicitly in favor of "an extensive surrender of national fiscal sovereignty."
[4] Deo, Stephane, Paul Donovan and Larry Hatheway. 2011. "Euro break-up — the consequences." UBS Investment Research. Global Economic Perspectives. September 6.
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