Friday, November 23, 2012

What Kind Of Reforms Are Needed In Europe?

The prevailing wisdom in Europe is that struggling countries need to become more competitive.  They can become more competitive by cutting labor costs and by giving corporations more incentives to invest.  The assumption is that they can export their way out of financial difficulty.  That might be true for single country, but it can't be true for Europe as whole.  Exports and imports must net out to zero.

The alternative to export led growth is to build up demand in the domestic sector.  The problem with that strategy is that growing income inequality has a negative effect on domestic demand. This article, written by the chief economist for an organization promoting reform in Europe, argues for stimulating domestic demand by invoking more progressive tax policies. 

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