Two Ways, But Where To?

by Anthony de Jasay

Library of Economics & Liberty
July 2, 2012

Having for a pulpit a regular column in the New York Times, Paul Krugman speaks to us as one who is really sure about what is what. He is also thoroughly exasperated by the pigheaded blindness of those of us who have their hands on the levers of policy and are responsible for the astronomical waste and needless pain inflicted on the economies on both sides of the Atlantic and especially on the Eurozone. His thesis is that we are actually in a state of genuine depression, involving a loss of potential output that hardly bears thinking about. The depression is of our own making and is unnecessary, serving no purpose. It ought to be and could be terminated forthwith.

Its cause is the misguided attempt by the majority of Eurozone states to tackle their indebtedness by reducing the rate at which it has been increasing as a proportion of GDP for the last two or three decades. For the average Eurozone state, this proportion rose from 30 to 90 per cent of GDP. It is now rising each year at 3.5 or 4 percentage points for Italy and France and at 8 percentage points for Spain—to speak only of the countries that are not on intensive care like Greece, Portugal and Ireland, nor in reasonable health like the Teutonic group. All 17 states signed up to the Golden Rule that would limit their "structural" budget deficit to 0.5 per cent of GDP, but it is far from evident that all will succeed or even genuinely try, to achieve this in the foreseeable future. The agreement they signed, though not yet ratified, provides for "sanctions" by the European Court of Justice, but serious sanctions cannot realistically be applied. Meanwhile, the order of the day is austerity, mostly by cutting expenditure as in Spain, increasing taxation as in France, and curbing tax evasion as in Italy.

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