Monday, June 3, 2013

Wolfgang Munchau Explains Why Austerity Will Raise Its Ugly Head Again In Europe

The headlines in Europe indicate that the focus on fiscal contraction is being replaced by structural reforms that will fix the eurozone economy in the long run.  The structural reforms will not reduce debt to GDP ratios because banks are still in trouble and credit is not available to restore the necessary growth.  The failure to reach imposed fiscal goals will lead to another wave of pro-cyclical fiscal policy that is known as austerity.  It will keep coming back like the monsters in a B movie according to Munchau.  He also makes some important points about the way in which many think about the eurozone economy.  Since the eurozone is a closed economy with a common currency, inflation can only occur at the eurozone level.  Nobody would argue that inflation would occur in one of the states in the US as a result of federal policies that affect all of the states.

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