European Fiscal Crisis and Growth of the World Economy
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Since the worldwide financial crisis of 2008-2009, many countries have tried various methods to boost their economies using all the possible policy instruments at their disposal. Some of those policies left serious aftermath behind. Several European countries, known as the PIIGS, are those which have been most seriously hit by the aftermath. Accumulation of budget deficit and the consequent snowballing of national debt have put them under a severe fiscal crisis. This crisis has driven those countries to adopt massive deflationary policies in order to survive imminent national default, dragging their economies into a grim depression. With increasing interdependence among individual national economies at the time of globalization, the adverse effect of those deflationary policies spread to the other economies with a significant impact. According to McCombie-Thirlwall growth model of linkage effect, the deflationary policies of the PIIGS countries should drag not only those countries but also the rest of the world into a trap of economic depression, because of both linked multiplier effect and an inherent asymmetry in the adjustment mechanism for balance-of-payments disequilibrium in the international economy. Moreover, in long-term perspective, this status of low stagnant growth should persist for quite a while in the international economy, until the fiscal crisis of the PIIGS countries is resolved. With this dismal prospect for the world economy, the only way out of the trap of stagnant economic growth is that the countries involved figure out some kind of coordinated solution to pull the PIIGS countries out of their fiscal crises. The coordinated solution should contain not only financial aid to the PIIGS countries but also a conversion of balanceof-payments adjustment mechanism from deflationary adjustment to reflationary one.
Abstract
Since the worldwide financial crisis of 2008-2009, many countries have tried various methods to boost their economies using all the possible policy instruments at their disposal. Some of those policies left serious aftermath behind. Several European countries, known as the PIIGS, are those which have been most seriously hit by the aftermath. Accumulation of budget deficit and the consequent snowballing of national debt have put them under a severe fiscal crisis. This crisis has driven those countries to adopt massive deflationary policies in order to survive imminent national default, dragging their economies into a grim depression. With increasing interdependence among individual national economies at the time of globalization, the adverse effect of those deflationary policies spread to the other economies with a significant impact. According to McCombie-Thirlwall growth model of linkage effect, the deflationary policies of the PIIGS countries should drag not only those countries but also the rest of the world into a trap of economic depression, because of both linked multiplier effect and an inherent asymmetry in the adjustment mechanism for balance-of-payments disequilibrium in the international economy. Moreover, in long-term perspective, this status of low stagnant growth should persist for quite a while in the international economy, until the fiscal crisis of the PIIGS countries is resolved. With this dismal prospect for the world economy, the only way out of the trap of stagnant economic growth is that the countries involved figure out some kind of coordinated solution to pull the PIIGS countries out of their fiscal crises. The coordinated solution should contain not only financial aid to the PIIGS countries but also a conversion of balanceof-payments adjustment mechanism from deflationary adjustment to reflationary one.
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