Austerians May Not Want To Waste A Good Crisis

Noah Smith believes that economists in Europe believe that the struggling economies in the eurozone are in trouble because they don't let markets work the way they are supposed to work.  Structural reform is necessary to fix their economies.  The reforms that they propose are much like those advocated by the IMF and World Bank that has been called the Washington Consensus.  Fiscal stimulus might improve things for the short term but it would delay the necessary structural reforms.  They think that the crisis provides an incentive to make the necessary structural reforms.

The Washington Consensus is no longer the single recipe advocated by the IMF.  It now recognizes that the medicine has to be designed to fit the needs of each country and it will vary from country to country.  Spain was doing very well before the real estate bust and it was not overloaded with sovereign debt.  It is almost impossible to implement austerity and structural reforms that might improve the Spanish economy in the long run when it has a 26% unemployment rate.  Unfortunately, the critics of fiscal stimulus have always favored structural reforms in recessions.  They assume that unemployment would not exist if markets were allowed to work their magic.  They don't want to use monetary policy or fiscal policy to prevent structural reforms.  Some countries have no choice.  They can't borrow at affordable rates and they have no control over monetary policy which resides in Brussels or Berlin.  Globalization and a common currency has not worked well for them in the crisis.  It has also created problems for countries like the US which has its own currency and can borrow at affordable interest rates.  Its not easy to maintain a full employment economy with trade deficits that average around 5% of GDP.