The economics of deflation in the euro area: a critique of fiscal austerity

Abstract

This paper points out that the roots of the euro-area crisis are to be found in the loss of monetary sovereignty and an unsustainable credit-led economic growth in a variety of 'peripheral' countries. It addresses the negative consequences of fiscal austerity in the euro-area crisis framework, in particular regarding the distribution of income and the economic and financial relations between 'core' and 'peripheral' countries within the euro area. The paper also argues that the deflationary effects of the conventional policy reaction to the euro-area crisis will aggravate recession over the medium-to-long run in that area, owing to their negative impact on demand in the product markets across the whole European Union, whose competitiveness will suffer under the very measures that are supposed to enhance it in the global economy.

The gold standard and the euro: A reflection from a reading of A Tract on Monetary Reform

“…The role of Germany and other northern European countries has become crucial in forcing indebted countries to rely solely on growth in external demand. In turn, the curtailment of this growth due to widespread austerity policies has led to an extension of the difficulties which derive from the fall in GDP (Mastromatteo and Rossi, 2015). For example, the end of high deficits in the current account balance had to be carried out mainly by way of reduction in imports rather than by increasing exports, as a direct result of European recession.…”

The Performativity of Potential Output: Pro-Cyclicality and Path Dependency in Coordinating European Fiscal Policies

“…The ongoing deleveraging in the private and/or public sector leads these countries ever deeper into debt-deflationary territory (e.g. Koo, 2013;Mastromatteo & Rossi, 2015), from which the EC's pro-cyclical PO estimates make it nearly impossible to escape, because the model's implicit imperative in a prolonged crisis is simply more fiscal austerity (see section 4). Third, there is a densely populated middle area, where the trajectories of individual countries largely cancel each other out.…”

Delayed Fiscal Adjustment and Economic Growth: Empirical Evidence Using Autoregressive Distributed Lag Bound Testing Model

“…However, the related theoretical and empirical economic literature provides an inconclusive debate on the effect of fiscal adjustment on economic growth. The ongoing academic debate, generated by those who support fiscal adjustment and those who promote fiscal expansionary policies, has revealed both benefits and drawbacks for economic growth (Alesina and Perotti (1995); McDermott and Wescott (1996); Alesina et al (1998); Zaghini (2001); Krugman (2010); Baldacci et al (2013); Alesina et al (2015); Mastromatteo and Rossi (2015); Attanasia and Metelli, (2017)).…”