Nighttime Must-Read: Simon Wren-Lewis: Eurozone Fiscal Policy

Simon Wren-Lewis: Eurozone Fiscal Policy: “The impact of fiscal austerity on the Eurozone as a whole has been immense….

…I did a back of the envelope calculation which said that GDP in 2013 might be around 4% lower as a result of cuts in government consumption and investment…. Sebastian Gechert, Andrew Hughes Hallett and Ansgar Rannenberg… use a meta analysis… fiscal multipliers are larger in depressed economies… GDP was 7.7% lower by 2013…. been willing or able to counteract. Yet the speed at which those in charge of the Eurozone begin to realise the mistake that they have made is painfully slow. Take this recent Vox piece by Marco Buti and Nicolas Carnot…. The mistake there is simple. When monetary policy is stuck at the Zero Lower Bound… getting the fiscal gap right is important in the longer term, but in the short term it is the means by which you get the output gap to zero…. An additional complication… a country… too competitive relative to the rest of the Eurozone… needs to run a positive output gap… to generate the inflation that will correct that position, and vice versa. For that reason Germany needs a large positive output gap at the moment… therefore a much more expansionary fiscal policy…. So at both the aggregate and individual country level, the inappropriate bias towards fiscal contraction that caused huge losses in the Eurozone in the past continues to operate…

March 15, 2015

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