Multiplikatorn. The entire EU austerity plan is based on a false premise.
The Teuto-Calvinists believe that the fiscal multiplier is around 0.5
The entire EU austerity plan is based on a false premise.
This disastrous error is now clear beyond any reasonable doubt.
The Teuto-Calvinists believe – or profess to believe, since much of their dogma is national self-interest dressed up as theory – that the fiscal multiplier is around 0.5.
That is to say, fiscal retrenchment worth 1pc of GDP will cut output by half as much, or around 0.5pc over two years. There is pain, but at least there is gain.
This is based on the IMF's analysis of fiscal crises over the decades.
Well, it has not worked out like that. Ireland has contracted at nearly seven times the speed, Spain four times, and Greece three times.
Here is a table put together by Jean-Michel Six from S&P using IMF data.
The multiplier is nearer 2.0 for part of the Club Med bloc.
So what went wrong? It is blindingly obvious.
The IMF data – and indeed the more extreme theory of `expansionary fiscal contractions' (which the IMF does not endorse) – is based on past cases where individual countries were able to claw their way out of trouble by exporting to a healthy global economy, usually by devaluing first and often by slashing interest rates as well.
Greece, Spain and Italy cannot devalue. Most of Europe is tightening fiscal policy in lockstep.
They are all dragging each other down.
It is synchronised policy suicide.
Ambrose Evans-Pritchard, 3 October 2012
The entire EU austerity plan is based on a false premise.
This disastrous error is now clear beyond any reasonable doubt.
The Teuto-Calvinists believe – or profess to believe, since much of their dogma is national self-interest dressed up as theory – that the fiscal multiplier is around 0.5.
That is to say, fiscal retrenchment worth 1pc of GDP will cut output by half as much, or around 0.5pc over two years. There is pain, but at least there is gain.
This is based on the IMF's analysis of fiscal crises over the decades.
Well, it has not worked out like that. Ireland has contracted at nearly seven times the speed, Spain four times, and Greece three times.
Here is a table put together by Jean-Michel Six from S&P using IMF data.
The multiplier is nearer 2.0 for part of the Club Med bloc.
So what went wrong? It is blindingly obvious.
The IMF data – and indeed the more extreme theory of `expansionary fiscal contractions' (which the IMF does not endorse) – is based on past cases where individual countries were able to claw their way out of trouble by exporting to a healthy global economy, usually by devaluing first and often by slashing interest rates as well.
Greece, Spain and Italy cannot devalue. Most of Europe is tightening fiscal policy in lockstep.
They are all dragging each other down.
It is synchronised policy suicide.
Ambrose Evans-Pritchard, 3 October 2012
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