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Germany Should End Austerity, Not Ireland

Summary:
Germany Should End Austerity, Not Ireland Anti-austerity fever is sweeping Europe as policy makers decide the way to get from crisis to growth involves higher spending. Well, not so fast. The fever has already spread to the highest levels. At the International Monetary Fund’s recent spring meetings in Washington, IMF Managing Director Christine Lagarde and her deputy, David Lipton, repeatedly urged euro-area countries to focus on investment rather than budget cuts. Then came the European Commission president, Jose Manuel Barroso, who said April 23 that austerity has reached the limits of political and social support. A day later, Italy’s prime minister designate, Enrico Letta, wasted no time declaring that “Europe’s policy of austerity is no longer sufficient.” The argument is compelling: Less retrenchment will allow more money to feed into the economy, which should support domestic investment and consumption, and so stimulate growth. That in turn should reduce budget deficits by increasing tax revenue, creating a virtuous circle. Yet easing austerity involves trade-offs that might not be worth making for the weaker euro-area economies. Paradoxically, it is healthier euro-area countries such as Germany, which aren’t considering a relaxation of austerity, that should do it. To read the rest, see the original piece on Bloomberg View.

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Germany Should End Austerity, Not Ireland

Anti-austerity fever is sweeping Europe as policy makers decide the way to get from crisis to growth involves higher spending. Well, not so fast.

The fever has already spread to the highest levels. At the International Monetary Fund’s recent spring meetings in Washington, IMF Managing Director Christine Lagarde and her deputy, David Lipton, repeatedly urged euro-area countries to focus on investment rather than budget cuts.

Then came the European Commission president, Jose Manuel Barroso, who said April 23 that austerity has reached the limits of political and social support. A day later, Italy’s prime minister designate, Enrico Letta, wasted no time declaring that “Europe’s policy of austerity is no longer sufficient.”

The argument is compelling: Less retrenchment will allow more money to feed into the economy, which should support domestic investment and consumption, and so stimulate growth. That in turn should reduce budget deficits by increasing tax revenue, creating a virtuous circle.

Yet easing austerity involves trade-offs that might not be worth making for the weaker euro-area economies. Paradoxically, it is healthier euro-area countries such as Germany, which aren’t considering a relaxation of austerity, that should do it.

To read the rest, see the original piece on Bloomberg View.

Megan Greene
Megan Greene is the Chief Economist at Maverick Intelligence, with a particular focus on Europe. She is also a senior fellow at the Atlantic Council, a columnist with Bloomberg and a senior research fellow at Trinity College Dublin. The opinions expressed here are her own and do not reflect those of any employers. Ms Greene offers a strictly independent voice without a political or investment agenda.

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