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Austerity or stimulus? With the IMF leaning towards the latter, the neo-Keynesian pro-stimulus crowd think they have the upper-hand. As far as Britain’s concerned, the IMF does see some scope for bringing forward infrastructure investment, but that’s hardly an endorsement of Labour’s policy of opposing just about every cut the Coalition makes to current spending.

In the Eurozone, however, the neo-Keynesians are on stronger ground. To put it mildly, the extreme austerity imposed on southern Europe has yet to prove a success. 

Writing in the New York Times, the conservative commentator Ross Douthat is horrified by what he sees across the Atlantic:

  • “…[the Eurozone] is subjecting its weaker member states to an extraordinary test of their resilience, and conducting an increasingly perverse experiment in seeing how much stress liberal norms can bear. 
  • “That stress takes the form of mass unemployment unseen in the history of modern Europe, and mass youth unemployment that is worse still. In the Continent’s sick-man economies, the jobless rate for those under 25 now staggers the imagination: over 40 percent in Italy, over 50 percent in Spain, and over 60 percent in Greece.
  • “…they face a future of stagnation — as aging societies with expensive welfare states whose young people will sit idle for years, unable to find work, build capital or start families.”

Writing in the Telegraph, Ambrose Evans-Pritchard is not just horrified, but also angry – describing the bail-out of Greece as a “squalid episode’: 

  • “The [IMF] report said the terms of the rescue violated three of the IMF’s four key rules for lending to insolvent countries, no small matter given that it was the biggest loan the Fund has ever made in proportion to a member’s quota, and given that staff were “unable to vouch that public debt was sustainable”.
  • “It admitted that the 2010 package was a ‘holding operation’ that ‘gave the euro area time to build a firewall to protect other vulnerable members and averted potentially severe effects on the global economy’.”

There seems little doubt that assumptions made by the IMF, the European Commission and the European Central Bank – the ‘Troika’ – were grotesquely miscalculated:

  • “The Troika originally said that Greece’ economy would contract by 2.6pc in 2010 under the austerity regime, before recovering with growth of 1.1pc in 2011, and 2.1pc in 2012.
  • “In fact, Greek GDP remained in an unbroken free-fall. It did not grow in either year. It contracted a further 7.1pc in 2011, 6.4pc in 2012.
  • “Roughly speaking, the Troika misjudged the scale of economic decline over three years by 12pc of GDP. The total decline will be around 25pc, surely a Great Depression.”

On the face of it, the neo-Keynesians have every reason to feel smug. But, actually, they’ve every reason to feel abashed – if, that is, they combine pro-stimulus views on economic policy with pro-single currency views on European policy. 

The fact is that, by its very nature, the Eurozone – and the wider European Union – makes a Keynesian response to economic crisis all but impossible.

To stimulate an ailing economy with borrowed money is a risk. Resources are effectively transferred from the future to the present, in the uncertain hope that the debt will be paid-off in the form of stronger economic growth. In a Eurozone context, however, the borrowing is done by one set of countries largely for the benefit of another set of countries – i.e. the transfer of risk takes place not just between generations, but between nations too. Thus, however strong the economic justifications, political considerations are bound to run counter to timely action.

One further inconsistency between the pro-stimulus and pro-EU positions: We are constantly told by British europhiles that the British economy is inextricably linked with that of the Continent. And yet many of the same people confidently maintain that the British government need only abandon austerity to revive the British economy.

With most of Europe in the grip of austerity, do they really imagine that a policy of 'stimulus in one country' stands a chance of succeeding?

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