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Europe No Longer Keen On Keynes

Europe No Longer Keen On Keynes

Reporter ,  21-Oct-10

In a blow to the followers of John Maynard Keynes and his philosophy of deficit spending, Britain and other European economies are leaning towards austerity rather than deficit spending to come out of the current economic crisis. The British economist was the propagator of the principle that in order to come out of a recession, governments need to increase spending to kick start the economy, in spite of the spike in the government deficit that would result. He argued that the deficit would be more than made up once the economy was back on track and increased economic activity refilled the government coffers. His theories were supported by the turnaround after the Great Depresssion of 1935, when government spending on infrastructure and defence during World War II helped the global economy recover.

However, the recession of 2007 seems to have proved the eminent economist wrong. Governments the world over have been pumping billions of dollars into their respective economies over the last 2 years to try and turn them around. However, response has been low and the same governments are faced with ballooning deficits which they are trying to control. In Britain, George Osborne, Chancellor of the Exchequer (the equivalent of the Finance Minister) argued forcefully against any more supports to the sagging economy, and said that Government cuts were expected, to the tune of half a million jobs and over $130 billion in spending. This would affect pensioners, poor, military and the middle class adversely. The minister stated that the cuts were necessary to reduce the country’s budget deficit, presently at 11 percent of gross domestic product (GDP).

His feelings are echoed in Ireland, which is reeling under a deficit of nearly 32 per cent of the GDP, presently the highest in Europe. Ireland has instituted a fresh round of spending cuts and tax increases. The cuts will add up to as much as 14 per cent of the Irish GDP. The threat of a double dip recession remains palpable across Europe, with governments from Germany to Greece slashing budgets and spending. Across the Atlantic, the US government continues to focus on deficit spending as a means of breaking through the recession. Policy makers there are wary of reducing spending too quickly, lest they see a repeat of the 1935 Great Depression, when budget cuts in the middle of the recession resulted in prolonging the downturn.

Economists have argued against the policy direction being taken by Europe, but the memories of the IMF having to step in to support an ailing Greece are fresh in everyone’s minds. The British government is hoping for an economic recovery fueled by the US spending to bring up the necessary stimulus while it cuts costs to set its own house in order. However, economists argue that this may be a mistake and the lowered spending and tax collection due to dropping demand will ultimately force the government to go back to Keynes. Lawmakers are hoping that this does not happen, for then they will be worse off than before.

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