Multiplying Europe’s fiscal suicide
By Ambrose Evans-Pritchard
October 3rd, 2012
The entire EU austerity plan is based on a false premise. This disastrous error is now clear beyond any reasonable doubt.
The Teuto-Calvinists believe – or profess to believe, since much of their dogma is national self-interest dressed up as theory – that the fiscal multiplier is around 0.5.
That is to say, fiscal retrenchment worth 1pc of GDP will cut output by half as much, or around 0.5pc over two years. There is pain, but at least there is gain.
This is based on the IMF’s analysis of fiscal crises over the decades.
Well, it has not worked out like that. Ireland has contracted at nearly seven times the speed, Spain four times, and Greece three times.