Design Failures in the Eurozone. Can they be fixed?. Paul De Grauwe London School of Economics. Eurozone ’ s design failures: in a nutshell. Dynamics of booms and busts are endemic in capitalism
Paul De Grauwe
London School of Economics
The more intense austerity programs coincide with increasing government debt ratios.
The underlying mechanism is well known since the days of Irvin Fisher (Fisher(1936)).
the stronger is the austerity program the deeper is the decline in GDP.
The estimated equation suggests that on average for every one percent increase in austerity output declines by 1.4%
a one percent increase in austerity on average leads to a 0.5% improvement in the budget balance.
Put differently, in order to improve the budget balance by 1% an austerity program of at least 2% is necessary
Since fiscal multiplier = 1.4 this means that the cost of 1% improvement in budget balance has a price of a loss of output of 2.8%
Two components of fiscal union