An adjustment is not a solution for the crisis
An adjustment as way out or as a cause of the crisis?
Already we have been saying repeatedly and in different ways in this blog: that fiscal austerity is not the solution for the crisis. In contrast, we could state that seems increasingly being the cause.
El ajuste como salida o como causa de la crisis
Ya lo veníamos diciendo repetidas veces y de diferentes formas en este post: la austeridad fiscal no es la salida de la crisis. Por el contrario, ya casi podríamos afirmar que se parece cada vez más a su causa. En esta línea de pensamiento, el Fondo Monetario Internacional (FMI) -a través de su economista jefe, Olivier Banchard, y de Daniel Leigh- publicó recientemente un artículo que afirma que los multiplicadores fiscales son mucho más elevados que los supuestos hasta ahora.
(http://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf).
Es por ello que las previsiones de caída del producto durante esta crisis eran menos pesimistas que lo que la realidad enseñó.
Separemos este argumento por partes para entenderlo bien. En primer lugar, cuando se reduce el gasto público o se incrementan impuestos, la actividad económica se ve deprimida en forma directa por una menor demanda agregada. Pero, a su vez, este menor nivel de actividad también genera efecto sobre los ingresos, y por tanto sobre el consumo, que termina impactando también en la inversión. Así, se van desarrollando efectos indirectos también depresivos. La suma de los efectos directos e indirectos constituye justamente el multiplicador fiscal, es decir el efecto contractivo total de una política fiscal contractiva. De esta forma, no es tan claro, como indican muchos modelos económicos, que ante una reducción en el gasto público, el gasto privado compensará la caída. Más bien, suele suceder lo contrario, más aún en un contexto de muy bajos tipos de interés de referencia, que no pueden seguir descendiendo, y de demanda tan reducida.
Entonces, que los multiplicadores fiscales sean más elevados que lo inicialmente considerado significa que el efecto recesivo del ajuste es mayor que el pensado al tomar la decisión de recortar. Esto no solo tiene efectos más importantes sobre el desempleo, por ejemplo, como bien detallan los autores en el artículo. También tienen efectos sobre la recaudación. De esta forma, como también había “confesado” el FMI hace unos meses, las políticas de ajuste no solo son más recesivas, sino también menos efectivas para su objetivo principal que es la solvencia de los Estados.
En definitiva, hasta el FMI, institución que históricamente recomendó siempre a América Latina y otros países en desarrollo políticas de consolidación fiscal, da indicios de que la austeridad puede no estar surtiendo efecto y de que existe la posibilidad de que sea la causante de la perduración de la crisis. Ahora solo restaría que se convenzan las autoridades económicas de la Unión Europea, fundamentalmente las alemanas. A ver si son capaces de proponer una solución algo más interesante de la crisis, y algo menos destinada al fracaso.
También está la alternativa que los países puedan gastar más (de forma seria y eficiente) de manera tal que se pueda salir de la recesión y tener la posibilidad de pagar las deudas.
Los mercados no son ciegos y es posible que una política fiscal inteligente sea bien interpretada por los mercados. Al fin y al cabo si aumenta el déficit pero aumenta el PIB el % de deuda puede incluso ser menor y esto significa ni más ni menos que se puede pagar la deuda.
I totally share my opinion with this post. Increasing the expenses is undoubtedly a serious alternative to the actual economics circumstances, where the fiscal contraction policies are drowning the mostly of the European economies. The question is: Why German authorities must have such a decision power concerning Europe economics? Austerity policies could don´t affect negatively to Germany, It could even benefice the country. Germany has nowadays a low unemployment rate around 6%, a low debt cost and the country GDP is increasing as well as its productivity. However these policies are deeply damaging the growth and the recovery of other European countries such as the called PIGS (Portugal, Italy, Greece and Spain). Why Spain has to follow the instructions of the markets or the instructions of Angela Merkel? Why not trying to be more independent? Why not facing up to the real problems? As Mr. Sotelek explains fiscal contractions to reduce benefits can only slow down the recovery.
Javier Thanks for your comment,
Indeed, the macroeconomic adjustment measures being taken in the European Union show that the development of a two-speed Europe evolving, whereas the Mediterranean countries are being punished excessively. Increasing spending might be a solution provided it is done consistently, so that helps boost confidence in the economy by investors.
Best Regards
Daniel
I absolutely agree with the author, the adjustment is not the solution in order to overcome the actual crisis. The fiscal measures adopted by the Spanish Government consist of reduce expenses in fields such as education, health or security. Furthermore, Government has increased several taxes during last year such as VAT. As a consequence of these fiscal measures, people are reducing consumption and inversion, namely demand is reduced and thereby the activity of the country. Finally the most important consequence occurs, the income decrease.
As the author explains in his post, this alternative is not the correct. In my opinion, it is necessary adopt other policies that promote employ, consumption and inversion in order to reactive the economy of our country.
Hello Carolina,
In recent years the Spanish economy has been based mainly on domestic consumption. The high rate of unemployment and rising tax rates among others, lower the purchasing power of the Spanish. Although exports have increased slightly it is not sufficient to balance this huge drop in consumption. The economy is suffering heavily. We can not change our economic model overnight.
Regards
Daniel
Fiscal consolidation policies taken by EU are nothing but creating a bubble for double dip recession. It increases unemployment rate, inequity, and reduces income of households.
A two-tier eurozone(creditors and debtors ) would eventually destroy the European Union because the disenfranchised would sooner or later withdraw from it. If a political union is not attainable the next best thing would be an orderly separation between creditor and debtor countries. If the members of the euro cannot live together without pushing their union into a lasting depression, they would be better off separating by mutual consent.
If euro breaks up it will destroy the common market and the European Union. Europe will be worse off than it was when the effort to unite it began, because the breakup will leave a legacy of mutual mistrust and hostility. The later it happens, the worse the ultimate outcome.
The global financial system is reducing its excessive leverage and exports are slowing down worldwide. Fiscal austerity in Europe is exacerbating a global trend and pushing Europe into a deflationary debt trap. That is, when too many heavily indebted governments are reducing their budget deficits at the same time, their economies shrink so that the debt burden as a percentage of GDP actually increases.
The difficulty is in convincing Germany that its current policies are leading to a prolonged depression, political and social conflicts and an eventual breakup not only of the euro but also of the European Union. Germany had a traumatic experience with inflation consequently it recognizes only inflation as a threat to stability and ignores deflation, which is the real threat today.
Steps That Need To Take
First step would be to establish a European Fiscal Authority (EFA) that would be authorized to make important economic decisions on behalf of member states., re-establish the proper distinction between fiscal and monetary responsibilities,
Second EFA establish a Debt Reduction ,financing its bond purchases either through the ECB or by issuing Debt Reduction Bills—a joint obligation of the member countries—and passing on the benefit of cheap financing to the countries concerned. Either way the cost to the debtor country would be reduced to 1 percent or less.
Thanks Tanvi. Great comment! your proposal deserves time to reply. I’ll do sooner than later.
Best Regards
Daniel
I agree with what is stated in the article, all the cost containment measures which are being implemented will get the debt more or less controlled, but the side effects of these measures lead to lengthen the recession, the generation of more unemployment, the decrease of investments and furthermore the tax collection is not the expected. This makes paying debt remains a difficult task.
I think that the monetary union should propose other measures that encourage investment of big businesses in order to build confidence in the markets and so, promote job creation and reactivate consumption.
Thanks Antonio
money circulation is necessary, but players must add value!
After reading your article, I must say that I agree with you, Daniel, in that the austerity and fiscal measures have proven inefficient for some countries, like Spain. As you’ve stated, in our case, we’ve based our economy on domestic consumption, and that means we’re unable to grow properly, since we are attacking exactly that by increasing the taxes and granting companies the right to fire their employees, thus creating uneasiness and paralyzing the money circulation.
This current fear represents a huge contrast when compared with the past generation, who lived in ‘careless’ times, when the public banks offered loans and mortgages as if there was no tomorrow, without proper analysis of the risk. Now, the massive evictions that are taking place destroy those families while the banks themselves keep winning, immune to the damage caused by their recklessness.
I myself, being in my late 20s, even while being employed in a big company with a small percentage of job losses, don’t feel secure enough to think of a mortgage loan anytime soon, and save as much money as I can in case hard times come, while knowing that if things take a turn for the worse I can always look for a job outside Spain. This means that not only am I not helping the growth as much as I could (on the contrary, actually!), but I’m also not confident in my own country.
This situation, however, is unacceptable: we can’t have a 55% of the youth unemployed and those who have a job lacking confidence that they’ll keep it. If we are to grow, we need to make use of all the extra hands we have -which will be hard, considering we need to find a way for them to create extra value or we’ll end up losing more than we would win- and we need to ensure everyone that there’ll be a tomorrow, and lower their taxes, so they can spend, while controlling that they spend rationally and generate some value.
On the other hand, in the exceptional case of Spain, as the media shows everyday, we have a high rate of suspicion about most politicians, which we consider corrupt -and may I add, with a lot of circumstancial evidence in most cases- which means the general public is forced to suffer the abuses imposed by the higher taxes and the evictions ‘because we lived above our level’, while thinking of how the richer are becoming richer and so are their politicians.
To be honest, I’m rather surprised that with such an unemployment rate, and such a crisis not owed to the public, people won’t move and claim their right to ask responsibilities to the ones who actually played with their money or profitted from their ignorance to make them sign something they didn’t understand at all. I guess the media does a nice job at giving them something different to think about.
Hi David,
Transparency and accountancy! Transparencia y rendición de cuentas! agree.
daniel
As many of you I share my opinion with Daniel Sotelsek. I think that the crisis has not been caused by the austerity measures, in my opinion in Spain the origin of the crisis has been the speculation in the construction sector and that people have lived well beyond their means and this have been allowed by the banks. But the austerity measures developed by the government are being that the crisis continues. I think that austerity measures undertaken by the government in Spain are causing negative effects on society:
• If the government develops austerity measures people don’t have money and ´have not spend money.
• These measures not allow the improvement of the GDP. If the GDP in a country is worse the economy is depressed.
• I am also convinced that an austerity policy reduces the expenses of citizen and this fact is detrimental to the economy, not allowing their development.
If the government of Spain doesn´t develop austerity measures I think that will be possible a reactivationof the economy. There would be more money in society and improve the household consumption, this would allow a revival of the economy and would be a first step out of the crisis.
However although my opinion is this, I know that the way out of the crisis is not easy. If experts cannot find their way out of the crisis will be because it’s harder than it looks.
I would like to share a reflection with all of you: you think that besides the lack of money there is widespread fear in our society to spend money that is affecting both consumersand the economy? May be this is another impediment to overcome the crisis. What do you think about this?
Laura,
Thanks for your comments!
Trust is pricey intangible.