Tuesday, 2 July 2013

Does Too Much Debt Really Matter?

By Pedro Schwartz

Economists, especially in Europe, seem to be divided into two irreconcilable camps over the question of 'growth versus austerity'. From 2008 to 2012, the talk was all of consolidating public budgets, increasing taxes, closing down or merging unsafe banks, selling their assets at fire-sale prices, cutting down on pension and health entitlements, firing public employees, reducing trade union privileges and opening labor markets to competition—the classic panoply of measures the IMF used to demand of Third World countries when it moved in to rescue them. This time and for the Eurozone, the IMF was content to play second fiddle: the rescuers were Germany and other northern and central European countries; the peccant countries they had to rescue were those on the outer fringes of the Eurozone. The expectation was that this hard medicine would bear fruit at the latest in 2013 and bring renewed growth and employment after four years of contraction. Unexpectedly, and for reasons we hope to discover someday, there was a second dip in the recession. Public opinion, especially in countries suffering from high unemployment, became restless. In despair many Europeans leaders turned their eyes towards the United States, hoping to learn the lessons of its money-printing Federal Reserve and bond-issuing Treasury. The European Central Bank chief Signor Draghi promised to do "whatever it takes" to save the euro; Signor Monti was dealt a sharp lesson by Italian voters; the French President and the Spanish Prime Minister demanded growth-fostering measures to ease public deficit reduction; the European Council set in progress a program to help employ young people; and the European Community as a whole launched a plan to better rail and road transport on the Continent. Frau Merkel was cast into the role of a Dickensian Gradgrind who wanted everybody to stick to "Facts! Facts! Facts!" The policy climate had changed.

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