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Monday, May 07, 2012

The IMF on "Fiscal Sustainability and Market Confidence"

Here's an example of what Joe Stiglitz is talking about in the post below this one. The IMF embraces the confidence fairy:

How to Get the Balance Right: Fiscal Policy At a Time of Crisis, by Anders Borg and Christine Lagarde: Last autumn was a turbulent time for Europe. The debt crisis deepened and financial markets became embroiled in turmoil, driven by fears of widespread restructuring of public debt. The crisis has harmed growth, increased unemployment, and left a large number of people less protected.
We are now seeing some signs of stabilization. Most countries are reducing their deficits and even if debt ratios are still rising, the return back to fiscal health has begun. ...

How, exactly, do rising debt to GDP ratios signal a return to fiscal health? Anyway:

... Sweden provides an interesting case study for countries’ current predicament. In the early 1990s, Sweden was rocked by an economic crisis with escalating unemployment, double digit deficits, and a sudden loss of market confidence that raised the cost of sovereign borrowing.
In response, Sweden initiated a comprehensive set of reforms. Favorable external conditions helped, but domestic policies played a critical role in the adjustment. Strong fiscal tightening was implemented to regain fiscal sustainability and market confidence. ...

Never mind the evidence that austerity doesn't work -- it goes on to explain how other countries can use austerity to summon the confidence fairy for themselves.

    Posted by on Monday, May 7, 2012 at 09:13 AM in Economics | Permalink  Comments (60)


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