Past that, Europe should consider replacing austerity policies with growth measures. In a separate note today, Goldman Sachs economist Lasse Nolboell W. Nielsen lay out a (convincing!) case for expanding an economy, not paring its parts.
Greater consolidation leads to greater overall economic deterioration, Nielsen says. A fixed exchange rate complicates the situation, removing the cushion on exports from a depreciating exchange rate. In general, a country should not look to cut any more than 3% to 4% of gross domestic product in the short term, Nielsen estimates. Spain expects to cut some 4.5% of GDP; Italy sees cuts amounting to 3.5% of GDP.
But longer term consolidation and cut backs, such as improving governance and constraining politicians' discretionary power, makes sense.
"Our research suggests that the challenge of achieving external and fiscal balance is very large in the Euro area," Nielsen says.And, yes, that's understating the situation. Reach Abram Brown at email@example.com. Or follow him @abebrown716.
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