Healing Europe: Recasting the Future for Growth

January 1, 2014

This report makes the case that the “austerity” approach to solving the Eurozone crisis has not worked. Thus far, it has been counter-productive in that it is creating a vicious circle of economic contraction leading to a further rise in credit risk, which has led to a higher cost of government borrowing, which has then led to more untenable government debt conditions.

In addition, austerity is also raising the risks of a banking sector crisis in the Eurozone, as well as potentially dangerous political backlash, which could lead to the rise of radical and extremist politics.

One way to break this vicious circle is to recast the crisis in terms of lack of economic growth. Citing historical lessons learned from the US experience in managing government debts at the end of the Second World War (higher than the today’s Eurozone average), the report argues that sustained economic growth is the best way to resolve the government debt crisis. In fact, the crisis conditions today are creating a more favorable environment for the Eurozone governments in the crisis countries to implement structural reforms that could boost economic growth over the longer term. This will, however, require a shift in focus from austerity to growth, and a new political leadership to lead the way forward.

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