Europe Split Over Austerity as a Path to Growth

The tension between those realities will be on full display in Washington this week, as top economic officials from around the world gather for the spring meetings of the monetary fund and its sister institution, the World Bank. Once again, sluggish growth in advanced economies, and in particular the unfurling economic and fiscal afflictions in the euro zone, will be the central topic of discussion.

Political and economic officials agree that most countries, particularly in Europe, desperately need more growth. But they remain sharply divided on how to get it. Officials strongly influenced by the Great Depression thinking of John Maynard Keynes, including some from Europe, want an easing of austerity measures, more expansionary monetary policies and even some stimulus. But powerful northern European officials, including those from Germany, have argued that balanced budgets and fiscal consolidation are prerequisites for restoring sustainable growth.

In a somewhat dissonant posture, the monetary fund has split the difference: reassessing its views on austerity, pushing strongly for aggressive measures to bolster growth but all without repudiating its existing programs.

“We believe that for most European countries, fiscal consolidation is a must, simply given the level of debt,” said Christine Lagarde, the monetary fund’s managing director, speaking in New York this month. But she qualified that statement by saying that not all cuts need to be “brutal or abrupt or massively front-loaded.” She added, “There is a balance to be had between how much is called for and how much is tolerable.”

Economic fortunes during the recovery from the Great Recession have diverged, with new estimates of growth by the monetary fund expected on Tuesday. But they will not change the basic picture, which Ms. Lagarde has taken to describing as a “three-speed” world. Developing and emerging economies are growing apace. Some advanced economies, including the United States, are gaining strength.

But a third category of countries remains mired in stagnation or recession. Japan has struggled with a stalled-out economy, but has recently engaged in an athletic campaign of fiscal and monetary stimulus. The true laggard is Europe, suffering from rising unemployment and another bout of economic contraction — seemingly without the political consensus or economic mechanisms to tackle those problems.

“The European Union’s precrisis growth performance was disappointing enough, but the performance has been even more dismal since the onset of the crisis,” the European research group Bruegel concluded in a recent report, saying weak growth is undermining efforts to reduce debt and fueling bank fragility, all while skills erode for the unemployed. “Low overall growth is making it much tougher for the hard-hit economies in southern Europe to recover competitiveness and regain control of their public finances.”

Bruegel concluded that a failure to turn things around might render Europe’s social contract “unsustainable.”

In light of that reality, the monetary fund and its European partners, the European Commission and the European Central Bank — the so-called troika — have come under continued criticism for the austerity measures imposed on countries including Spain, Portugal and Greece, where unemployment rates extend well into the double digits. The criticism has become louder since the fund said it had determined that austerity had a far worse impact on weak economies than it once thought.

That assessment came in the form of a highly technical analysis of what economists term “fiscal multipliers” — essentially, a measure of how changes in a government budget affect growth at a given time. At the urging of the monetary fund’s chief economist, Olivier Blanchard, its research division last year started to investigate why the fund had overestimated rates of growth for some countries and underestimated them for others.

The researchers found that the multiplier used to forecast growth rates had not magnified the impact of government spending policies enough: Both austerity and stimulus had proved stronger-than-expected medicine.

Article source: http://www.nytimes.com/2013/04/16/business/global/europe-split-over-austerity-as-a-path-to-growth.html?partner=rss&emc=rss