Clarity about Austerity

Achieving a sustainable pattern of growth requires choices that affect not just the level of aggregate demand, but also its composition – for example, investment versus consumption. Whether one calls this austerity or something else is a matter of semantics, though the confusion that has resulted is anything but harmless.

MILAN – I have just had the privilege of speaking at the main annual conference of Germany’s Economic Council, the economic and business arm of the Christian Democratic Union, the current governing party. Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble were among the other speakers. It was an interesting event – and, more important, an encouraging one.

It seemed clear that Germany (or at least this rather large gathering of government, business, and labor leaders) remains committed to the euro and to deeper European integration, and recognizes that success will require Europe-wide burden-sharing to overcome the ongoing eurozone crisis. The reforms in Italy and Spain are rightly reviewed as crucial, and there appears to be a deep understanding (based on Germany’s own experience in the decade and a half following reunification) that restoring competitiveness, employment, and growth takes time.

Greece has no good options, but a serious contagion risk remains to be contained in order to prevent derailment of the fiscal and growth-oriented reforms in Italy and Spain. In the face of high systemic risk, private capital is leaving banks and the sovereign-debt markets, causing governments’ borrowing costs to rise and bank capitalization to fall. This in turn threatens the functioning of the financial system and the effectiveness of the reform programs.

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