"Europe caught between austerity and growth : Which way out of
the crisis?"
Dr. Kurt HuebnerJean Monnet Chair for European Integration and Global
Political Economy, University of British Columbiawww.ies.ubc.ca
Debt, Debt, Debt
• ..is there an end?
…and more to come
• …Private debts
‘Swabian Housewife ‘ Approach
Expansionary Fiscal Consolidation Hypothesis
• Reducing public debt by either expenditure cuts or increases in tax receipts, or a combination of both, is key for economic recovery
• Lowering public debt softens any ‘crowding out effect’ and returns ‘trust’ into financial markets
• Reducing public sector employment and public sector wages/entitlements
Does it Work?
• Short-term high social and economic costs• Austerity and financial instability lead to
recessions• …not only in the Eurozone
Lessons from the Past
• Empirical case studies of previous exercises in internal devaluation show that austerity only ‘worked’ in combination with strong exports
• Not all can follow a ‘beggar-thy-neighbor’-policy
• Paradox of thrift dominates• Keeping troubled economies in ‘bad equilibria’
Banking crises and not so much public debt crises
Private debt overhang crucialDe-leveraging of private sectors (households;
non-financial corporations, and financial corporations)
Cleaning-up of balance sheets a difficult and cumbersome process that tempers economic growth
Shrinking growth or even GDP then leads to a debt trap
Interplay risk and growth
• dt = pbt + (it-gt)/(1+gt)dt-1,• with Δd change in general public debt, pb
denominating primary budget, i the effective interest rate (including risk premium) on public debt and g the rate of nominal GDP (t is the time factor)
• the higher the yield above the growth of GDP, the higher must be a primary budget surplus in order to keep the debt constant
Interplay risk and growth
• dt = pbt + (it-gt)/(1+gt)dt-1,• with Δd change in general public debt, pb
denominating primary budget, i the effective interest rate (including risk premium) on public debt and g the rate of nominal GDP (t is the time factor)
• the higher the yield above the growth of GDP, the higher must be a primary budget surplus in order to keep the debt constant
Implications
• Bringing down yield via orderly defaults, haircuts, bond-buy back actions…
• Using fiscal space by some economies• Stretching adjustment without risking moral
hazard• Redemption fund or other forms of
‘eurobonds’