Welcome to the Institute of European Studies project to promote dialogue about EU-Canada relations. Here you will find traditional research in the form of brief policy papers and analysis. The site is also an interface for the public to express their opinions on EU-Canada relations in general and economic and environmental cooperation in particular. The site will hopefully act as a gateway to the wider news and opinion forums that are available.
The financial and economic crisis has turned the world upside down. The US, traditional custodian of orthodoxy, is now, under the Obama administration, advocating public spending and expansive economic policies to get out of the recession. Meanwhile, the Keynesian policy-loving Europeans believe the only way out of the current crisis lays in applying very harsh restrictive policies, by far the most extreme in the last 60 years.
European countries are apparently facing a grave dilemma: if their governments do not start cutting the high deficits, they will find it increasingly difficult to access a global financial market that no longer believes in their capability to repay their debts. But if they apply the restrictive policies needed to achieve that goal, they will be jeopardizing their economic recovery. Financial markets will punish them as well, believing that they will not be able to generate enough revenues to repay their debts. This is one of the many adverse paradoxes attributable to the global financial markets these days. To escape this vicious circle, all European governments chose the first option, that is, to cut public expenses and raise taxes, in the hope that markets would appreciate their effort to revert to a more orthodox path. The truth is that -surprise, surprise- markets have proved to be very ungrateful, and have welcomed these measures with skepticism for the aforementioned reasons.
Since all European governments are applying these measures simultaneously, another negative consequence of this reconcile-with-the-markets exercise is that it has become, in fact, a ‘race to the bottom.’ Sadly, we are bound to be at the ‘bottom’ for a long time, because there is another asymmetrical effect at work here. While the current deficits are a consequence of the present plunge in revenues due to the economic crisis—that is, they are conjunctural deficits—the structural consequences of enduring a long period of depression (i.e. people trapped in long-term unemployment who will not be able to find any job during the recovery) could be devastating. These are the kind of problems governments should be addressing now, but structural problems should be tackled with an eye towards the long term, and not with measures in the short term which are only aggravating the very problems they are supposed to alleviate.
What could be a feasible, effective alternative policy? Well, the recipe has long been invented and tried with success: spend now, save later. This simple rule, that is, use expansive economic policies to counter a major depression, and relatively restrictive ones when the economy is back on track, seems now to be an anathema for most of the finance ministers in the world. However, balancing the budget along the cycle, or in the long-term, as opposed to boasting an eternally balanced budget, has long become part of both mainstream macroeconomic policy and theory, despite the objections of some prominent Chicago School alumni.
Applying countercyclical measures, and applying them in proportion to the seriousness of the recession, is just an exercise in common sense. Yet, sometimes common sense has to defy well-entrenched convictions, even when it is evident that these convictions are prolonging the very economic agony they are trying to overcome. After all, dogmas have always led to pain, not to pleasure. The paradise of a masochist.
Francisco Beltran
Researcher, Institute for European Studies, University of British Columbia
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