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Euroland's debt strategy is an economic and moral disgrace
The Telegraph ^ | 10/14/2012 | Ambrose Evans-Pritchard

Posted on 10/15/2012 1:47:54 AM PDT by bruinbirdman

The International Monetary Fund has demolished the intellectual foundations of Europe's debt crisis strategy.

Drastic fiscal tightening in a string of interlinked countries does two to three times more damage than assumed, especially if there is no offsetting monetary stimulus.

Pushed beyond the therapeutic dose, it is self-defeating. At a certain point it becomes pain for pain's sake.

The error has long been obvious in Greece. The EU-IMF Troika originally said the economy would rebound quickly, growing 1.1pc in 2011, and 2.1pc in 2012, and on from there to sunlit uplands.

In fact, Greek GDP contracted by 4.5pc in 2010, 6.9pc in 2011, and is expected to shrink a further 6pc this year, and 4pc next year. If the Troika were a doctor, it would face manslaughter charges.

The IMF now admits -- or rather those in the IMF who always feared this outcome are at last able to say -- that this misjudgement goes far beyond Greece. Tightening by 1pc of GDP in rich countries does not lead to a 0.5pc loss of output over two years as thought.

The "fiscal multiplier" is not the hallowed 0.5 assumed by every finance ministry in Europe. The awful evidence since the global bubble burst in 2008-2009 is that the multiplier is between 0.9 and 1.7, or even higher for EMU's crucifixion belt.

The model constructed over the long boom years -- and largely drawn from isolated cases, each able to export its way out of trouble -- is dangerously wrong in a 1930s-style excess savings crisis with much of the world is slump.

Steen Jakobsen from Saxo Bank says the IMF's mea culpa is the "biggest financial story of the year". Indeed it is. The authorities have repeated the blunders of the Great Depression but with fewer

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TOPICS: Business/Economy; Crime/Corruption; Foreign Affairs; News/Current Events
KEYWORDS: eucrisis; evanspritchard; imf

1 posted on 10/15/2012 1:48:03 AM PDT by bruinbirdman
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To: bruinbirdman

According to the great Doctor Gary North, the litmus test of Keynesianism is the attack on austerity. He writes:

Let’s say that you are reading an article on what the Greek government should or should not do. You read that the government’s proposed austerity measures will lead to a reduction of production. This will lower tax revenues. The government-debt-to-GDP ratio will increase. Austerity will therefore not solve Greece’s economic problems.

The article was written by a Keynesian.


2 posted on 10/15/2012 2:34:22 AM PDT by gotribe (He's a mack-daddy
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To: bruinbirdman

And besides, fiscal austerity in Europe isn’t really happening.

3 posted on 10/15/2012 2:36:27 AM PDT by gotribe (He's a mack-daddy
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To: gotribe

Do you think our inflation rate is artificially set low?

4 posted on 10/15/2012 5:44:16 AM PDT by tbw2
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To: tbw2

If you’re talking CPI, heck yeah. Subtract out food and energy? Only reason they do that is to hold down social security payments.

5 posted on 10/15/2012 10:07:43 AM PDT by gotribe (He's a mack-daddy
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