Fixing the Economy
Fixing the Economy
Most observers expect Southern Europe to experience a lost decade as a result of the euro crisis. The record since the beginning of the euro crisis in 2009 is mixed. Major fiscal efforts have been made, a raft of reforms has been introduced, and the gap with the most competitive countries has been narrowed. However, because of imbalances accumulated in the decade preceding the crisis, the road is still long and Europe, unfortunately, has not yet devised a comprehensive strategy to tackle the problem. Supportive monetary policy and stronger inflation in countries such as Germany would help rebalancing, especially if is accompanied by a depreciation of the euro. The Commission also has a responsibility for implementing the fiscal framework in an economically sensible way. Europe, finally, has instruments it can use to help foster southern Europe’s adjustment. However, what Europe could in the end achieve is uncertain. Policymakers believe that a combination of budgetary adjustment and reform should be sufficient to restore full employment and external balance but this may be more difficult than thought. Europe may in the end be confronted by a choice between two opposite economic models: the “agglomeration model” and the “rebalancing model”. Both show that beyond the immediate macroeconomic and financial urgencies, the euro area is confronted with deeper choices about the type of economy it wants and the degree to which it is willing to accept the political consequences of its economic choices.
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