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"Europe caught between austerity and growth : Which way out of the crisis?"

"Europe caught between austerity and growth : Which way out of the crisis?". Dr. Kurt Huebner Jean Monnet Chair for European Integration and Global Political Economy, University of British Columbia www.ies.ubc.ca. Debt, Debt, Debt. ..is there an end?. …and more to come. …Private debts.

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"Europe caught between austerity and growth : Which way out of the crisis?"

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  1. "Europe caught between austerity and growth : Which way out of the crisis?" Dr. Kurt Huebner Jean Monnet Chair for European Integration and Global Political Economy, University of British Columbia www.ies.ubc.ca

  2. Debt, Debt, Debt • ..is there an end?

  3. …and more to come • …Private debts

  4. ‘Swabian Housewife ‘ Approach

  5. Expansionary Fiscal Consolidation Hypothesis • Reducing public debt by either expenditure cuts or increases in tax receipts, or a combination of both, is key for economic recovery • Lowering public debt softens any ‘crowding out effect’ and returns ‘trust’ into financial markets • Reducing public sector employment and public sector wages/entitlements

  6. Does it Work? • Short-term high social and economic costs • Austerity and financial instability lead to recessions • …not only in the Eurozone

  7. Lessons from the Past • Empirical case studies of previous exercises in internal devaluation show that austerity only ‘worked’ in combination with strong exports • Not all can follow a ‘beggar-thy-neighbor’-policy • Paradox of thrift dominates • Keeping troubled economies in ‘bad equilibria’

  8. Banking crises and not so much public debt crises • Private debt overhang crucial • De-leveraging of private sectors (households; non-financial corporations, and financial corporations) • Cleaning-up of balance sheets a difficult and cumbersome process that tempers economic growth • Shrinking growth or even GDP then leads to a debt trap

  9. Interplay risk and growth • dt= pbt + (it-gt)/(1+gt)dt-1, • with Δd change in general public debt, pb denominating primary budget, i the effective interest rate (including risk premium) on public debt and g the rate of nominal GDP (t is the time factor) • the higher the yield above the growth of GDP, the higher must be a primary budget surplus in order to keep the debt constant

  10. Interplay risk and growth • dt= pbt + (it-gt)/(1+gt)dt-1, • with Δd change in general public debt, pb denominating primary budget, i the effective interest rate (including risk premium) on public debt and g the rate of nominal GDP (t is the time factor) • the higher the yield above the growth of GDP, the higher must be a primary budget surplus in order to keep the debt constant

  11. Implications • Bringing down yield via orderly defaults, haircuts, bond-buy back actions… • Using fiscal space by some economies • Stretching adjustment without risking moral hazard • Redemption fund or other forms of ‘eurobonds’

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