Nouriel Roubini on Our Fiscal Follies
We need to loosen fiscal policy now and tighten fiscal policy later. That really does not look to be what we will do.
Nouriel Roubini:
Fiscal Follies by Nouriel Roubini: In the US, we have the worst of all possible worlds. On one hand, stimulus had become a dirty word – even within the Obama administration – well before the Republicans’ mid-term election victory ruled out another round altogether. On the other hand, medium-term consolidation will be all but impossible in America’s current atmosphere of hyper-partisanship, with Republicans blocking any tax increase and Democrats resisting reforms of entitlement spending. Nor is there any pressure from bond markets to concentrate the minds of policymakers.
In the periphery of the eurozone, the problem is the opposite: bond vigilantes are demanding that Greece, Ireland, Portugal, Spain, and Italy front-load fiscal consolidation or watch their borrowing costs go through the roof.... Markets don’t care that front-loaded fiscal consolidation is exacerbating recession and thus making the goal of reducing debt and deficits as a share of GDP near-impossible to achieve.
To avoid a persistent and destructive recession, the fiscal and structural reforms imposed by the bond vigilantes should be accompanied by other euro-zone policies that restore growth and prevent vicious debt dynamics. The European Central Bank should ease monetary policy in order to weaken the value of the euro and bootstrap the periphery’s growth. And Germany should cut taxes temporarily – rather than raising taxes, as planned – in order to increase disposable income and stimulate German demand for the periphery’s goods and services.
Alas, neither of the two biggest players in the euro zone is pursuing policies consistent with restoring sustained growth in the euro zone’s periphery. The ECB’s monetary policy is too tight; and Germany is front-loading fiscal austerity. Thus, the periphery is destined to a destructive deflationary and recessionary adjustment that will exacerbate the risks of recession, insolvency, eventual defaults and, possibly, exit from the euro.
In the United Kingdom, the new government gave several reasons for front-loading fiscal consolidation. The bond vigilantes might have woken up if early austerity was not implemented; the deficit was very large and the public sector bloated; and it is always politically easier to implement tough measures early in an administration, when popular support is still high and the next election is far off.... [T]he government could well end up with no plan B in case plan A – massively front-loaded austerity – leads to a double-dip recession...
