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Walking the austerity tightrope
Policymakers around the world face the awkward task of reducing debt while maintaining as much growth as possible, according to MLC Investment Management analyst Dr Susan Gosling.
"Trying to shrink debt as a proportion of GDP when GDP itself is shrinking is extremely challenging and has unavoidable social consequences," she said.
One had only to look to Greece to see the result of such policies, where youth unemployment is almost 50 per cent and 28 per cent are in poverty or at risk of it, she said.
Different countries take different approaches to the problem, said Gosling. While the US and the UK have both "cut interest rates to the bone" and led the way with quantitative easing, the UK has adopted a much tighter fiscal policy.
"Both the Eurozone and the UK, chastened by the bond vigilantes, have embarked on the oxymoronic policy of 'expansionary fiscal contraction'. The forlorn hope is that if the Government spends less the private sector will pick up the slack," Gosling said.
The experiment seems to have failed, with the UK job market continuing to contract - while the US economy is now creating jobs, she said.
"There are beginning to be mutterings about a change of stance in the UK, but for now at least the Eurozone remains stuck with austerity," Gosling said.
She warned that if the Eurozone "stubbornly takes the slow path" it could experience a "Japanese-style prolonged stagnation", which would be more likely if the Eurozone remained intact.
"We regard a prolonged stagnation as very unlikely in the case of the US - this would require repeated policy mistakes.
"While not impossible, the US policy mindset is to try everything until they get it right. Also the flexibility of the US economy should not be underestimated," Gosling said.
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