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CRISIS/ 5 more years or is there another way?

November Mon 05, 2012

(Infophoto)  (Infophoto)

An economic prophecy is emerging that leaves no room for hope for the end of the crisis before 2018. Angela Merkel stressed this last Saturday, and two months ago, Olivier Blanchard, the chief economist of the International Monetary Fund, presented this prediction, showing a slow recovery of the global economy until 2018. In November, a scenario for 2014-2020 that was prepared in Brussels will be released, and, based on the previews, it seems to be in line with these predictions.

On what are these previews based? They are based on the priority of the reduction of debt and the idea that, in order to do that, one needs policies of absolute rigor, even at the expense of growth. This deflationary choice, then, feeds the projections of a minimal growth for at least five years. The Eurozone is already subject to this policy imposed by the dominance of German program. America, whether Barack Obama or Mitt Romney wins, will have to deal with the priority of cutting debt at the end of the year.

How realistic is this prediction? Certainly the strategy cited, if implemented, will keep the markets in Europe and America stagnant and this will lead to similar stagnation or very slow recovery in global demand with damage to the exporting nations. It is not written anywhere, however, certainly not in the books on economics, that this strategy is the only one applicable.

For example, one could easily cut spending and taxes as well, and also aim to reduce the ratio of debt to GDP, and thus to enhance the sustainability of the debt itself through more growth, perhaps with a hair of inflation more, but temporary and easy to control. I have previously written about the positive example of this we can see in the UK.

I expect, listening to my American former students who work with the leaders both the democratic and republican parties, that America will follow a formula of rigor in any case, but one that is not too restrictive of the potential for growth. If Romney wins, this would be certain. Therefore, the predictions of Merkel and Blanchard are considered “conditional scenarios” and not projections of an inescapable trend, as the press is unfortunately reporting.



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