Damaging austerity policies

Abstract

The economic policy of complete austerity (where monetary and restrictive fiscal policies are implemented at the same time) is damaging for Europe, the EU and particularly the peripheral Eurozone members, for the basis of the monetary union and de facto for the entire EU project. Recent partial corrections based only on a relaxation of monetary policy (negative interest rates and quantitative easing) but with further fiscal consolidation at the same time do not help to mediate economic growth, and in fact increase inequality with negative political implications. This paper explains why austerity policies fail on two fronts: as a coherent set of economic ideas and as an economic policy. Austerity is a dangerous doctrine, as it has pushed millions of people, especially in the EU, into unnecessary distress. The experience of different countries with austerity led to catastrophic results in the 1930 and 1980s as well as during the recent global financial crisis. The panel econometric analysis shows that monetary and fiscal austerity measures as applied had a significant negative impact on GDP growth. There are better ways of managing a crisis other than through austerity, as austerity leads to internal devaluation and deflation. The best solution is to prioritize economic growth, which requires the simultaneous implementation of fiscal and monetary stimuli. This approach is the exact opposite to an austerity doctrine.The paper deals only indirectly with global economic modeling, but it is in line with Professor L. R. Klein’s view that economists need to be involved in current economic policy discussions. Crucial to his advisory role to President Carter was regular engagement in debates on the situation in American and the global economy, including the situation in Japan, and transition countries. It was his thinking that the work of macroeconomists should be applied to solving current practical problems of a particular country and the global economy.