Friday, October 3, 2014

How To Jumpstart The European Economy

This article assumes that the EZ economy is in an aggregate demand recession.  It argues that a combination of monetary and fiscal policy is required to reverse the negative trend that is underway.  A failure to do so increases the risk of disintegration in the EZ. 

Fiscal policy should be implemented by a 5% tax cut in the EZ.  Tax cuts work faster than increased government spending but they will also increase budget deficits.  They should be financed by lending from the ECB.  That will lead to a devaluation of the euro and stimulate export demand which will help to reduce budget deficits that result from the tax cut.

This proposal runs counter to the treaty that requires EZ members to bring their deficits down to the required target in the near term.  The major opposition to this kind of solution will be political rather than economic.

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