Solving Europe’s Credibility Problem

As the eurozone debates how to escape the stagnation trap in which it finds itself, one question has become increasingly important: Can governments credibly commit to trim public spending in the future while avoiding immediate cuts? Fortunately, the answer is yes: Fiscal accommodation now does not rule out consolidation later.

PARIS – As the eurozone debates how to escape the stagnation trap in which it finds itself, one question has become increasingly important: Can governments credibly commit to trim public spending in the future while avoiding immediate cuts? Fortunately, the answer is a qualified yes: there are ways to ensure that fiscal accommodation now is followed by consolidation later.

Growth and inflation in the eurozone remain much too weak. The European Central Bank’s latest assessment is bleak, and ECB President Mario Draghi has made no secret of the fact that risks remain on the downside. Nominal GDP growth – that is, real growth plus inflation – will not exceed 1.5% this year and may well end up perilously close to 1%.

Though monetary policy is supportive, it is close to reaching its limits, and the ECB’s initiative to stimulate credit by lending to commercial banks on super-cheap terms has not proved as effective as hoped. AAA ten-year government bonds currently yield about 1%, suggesting that markets do not expect a strong rebound.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.

required

Log in

http://prosyn.org/S1l8kZy;
  1. China corruption Isaac Lawrence/Getty Images

    The Next Battle in China’s War on Corruption

    • Chinese President Xi Jinping knows well the threat that corruption poses to the authority of the Communist Party of China and the state it controls. 
    • But moving beyond Xi's anti-corruption purge to build robust and lasting anti-graft institutions will not be easy, owing to enduring opportunities for bureaucratic capture.
  2. Italy unemployed demonstration SalvatoreEsposito/Barcroftimages / Barcroft Media via Getty Images

    Putting Europe’s Long-Term Unemployed Back to Work

    Across the European Union, millions of people who are willing and able to work have been unemployed for a year or longer, at great cost to social cohesion and political stability. If the EU is serious about stopping the rise of populism, it will need to do more to ensure that labor markets are working for everyone.

  3. Latin America market Federico Parra/Getty Images

    A Belt and Road for the Americas?

    In a time of global uncertainty, a vision of “made in the Americas” prosperity provides a unifying agenda for the continent. If implemented, the US could reassert its historical leadership among a group of countries that share its fundamental values, as well as an interest in inclusive economic growth and rising living standards.

  4. Startup office Mladlen Antonov/Getty Images

    How Best to Promote Research and Development

    Clearly, there is something appealing about a start-up-based innovation strategy: it feels democratic, accessible, and so California. But it is definitely not the only way to boost research and development, or even the main way, and it is certainly not the way most major innovations in the US came about during the twentieth century.

  5. Trump Trade speech Bill Pugliano/Getty Images .

    Preparing for the Trump Trade Wars

    In the first 11 months of his presidency, Donald Trump has failed to back up his words – or tweets – with action on a variety of fronts. But the rest of the world's governments, and particularly those in Asia and Europe, would be mistaken to assume that he won't follow through on his promised "America First" trade agenda.