Economic ResearchPublicationsSpecialsWill consolidation kill the eurozone recovery?

Will consolidation kill the eurozone recovery?

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Question marks over the continuation of the global economic recovery have appeared in recent weeks. China’s economic policymakers are attempting to curb buoyant business activity, optimism among Chinese companies is dwindling. In the USA there are mixed signals on the domestic economy, with labor market and housing data largely disap-pointing. Europe is dogged by the debt crisis, with its impact on the direction of fiscal policy. What is more, the G20 countries are still at odds about the right way forward for economic policy.

, Jul 08, 2010

Although US criticism of the German austerity package has faded since the G20 summit of 27/28 June, the “growth-friendly fiscal consolidation” planned by the industrial countries among the G20, without controls and sanctions, is not legally binding. Some Anglo-Saxon critics have already pinpointed the European austerity packages as the cause of a new recession. In the words of George Soros: “Europe faces almost inevitable recession next year and years of stagnation as policymakers’ response to the euro zone crisis caused a downward spiral”.

This discussion overlooks the fact that, quite like in the US, fiscal policy in Germany in 2010 is very expansionary and quite a few of the expansionary measures (above all the tax cuts) will remain in place beyond 2010. Even with the agreed austerity package (2011: 0.4% of GDP), the fiscal impulse in 2011 is substantially higher than in 2008.

Dr. Michael Heise