If you strip away the political correctness, Chapter Three of the IMF’s World Economic Outlook more or less condemns Southern Europe to death by slow suffocation and leaves little doubt that fiscal tightening will trap North Europe, Britain and America in slump for a long time.[...]
Normally, tightening of 1pc of GDP in one country leads to a 0.5pc loss of growth after two years. It is another story when half the globe is in trouble and tightening in lockstep. Lost growth would be double if interest rates are already zero, and if everybody cuts spending at once. [...]
“Not all countries can reduce the value of their currency and increase net exports at the same time,” it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a “death spiral”.
The Fund said damage also doubles for states that cannot cut rates or devalue – think Spain, Portugal, Ireland, Greece, and Italy, all trapped in EMU at overvalued exchange rates.
“A fall in the value of the currency plays a key role in softening the impact. The result is consistent with standard Mundell-Fleming theory that fiscal multipliers are larger in economies with fixed exchange rate regimes.” Exactly. [...]
[...] it is clear that Southern Europe will not recover for a long time. Portuguese premier Jose Socrates has just unveiled his latest austerity package. He has capitulated on wage cuts. There will be a rise in VAT from 21pc to 23pc, and a freeze in pensions and projects. The trade unions have called a general strike for next month. [...]
We are seeing a pattern – first in Ireland, now in Greece and Portugal – where cuts are failing to close the deficit as fast as hoped. Austerity itself is eroding tax revenues. Countries are chasing their own tail.
The rest of EMU is not going to help. France and Italy are cutting 1.6pc GDP next year. The German squeeze starts in earnest in 2011. [...] (UK Telegraph)
I could not agree more. The dangers of having so many countries facing huge budget deficits simultaneously is a problem, a very big problem and one which if it continues will take the rest of the economic powers down as well with regard to any real growth potential.
The politicians love to say that the worst of the financial crisis is over. But, in reality it is just the beginning of the next phase. And that phase is ‘lack of funds’ and it is hitting big governments from the top all the way down to the smallest of towns and cities across the United States.
In one town not all that far from me a very small town is in debt of nearly $1 million and the chatter of the budget for 2011 is not looking good at all. I expect that we will see more job cuts and decreased services. This will be commonplace throughout the nation in 2011 and perhaps even into 2012.
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