A Global "New Deal"?
ATHENS – The International Monetary Fund’s belated admission that it significantly underestimated the damage that austerity would do to European Union growth rates highlights the self-defeating character of “orthodox” recipes to address the causes of the debt crisis that followed the financial crash of 2008-2009.
Conventional theory suggests that a single country (or group of countries) consolidating its finances can expect lower interest rates, a weaker currency, and an improved trade position. But, because this cannot happen for all major economies simultaneously – one country’s (or group of countries’) austerity implies less demand for other countries’ products – such policies eventually lead to beggar-thy-neighbor situations. Indeed, it was this dynamic – against which John Maynard Keynes fought – that made the Great Depression of the 1930’s so grim.
Today’s problems are compounded by a lack of sufficient private demand – particularly household consumption – in the advanced economies to compensate for demand losses stemming from austerity. During the last two decades, consumption drove these countries’ economic growth, reaching historically high GDP shares.