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Flexible budget and easing up of the economy is believed to the simplest means to recover from a stagnated, growth-deprived economy. However, recent experience from Europe speaks otherwise.
In the article, ‘Europe’s Goldilocks Dilemma,’ published in Foreign Policy, points out that many leaders from the European Union (EU) are presently demanding a more flexible interpretation of the austerity policy and introduce flexibility in their budget (Blyth, 2014).
Nevertheless, the introduction of a flexible budget will not be easily possible because the recession in the EU is not simply because of its inflated debt problem, but due to its crippled banking system. This essay aims to summarize the article by Blyth (2014) that points out the need for the continuation of the austerity measure in the EU.
The article by Blyth (2014) presents a clear picture of the evolving debate among EU members regarding the future of their budgetary policy. The debate erupted when Italian Prime Minister Matteo Renzi forwarded the request to ease the austerity measures EU had adopted in 2012, underlined by the Treaty on Stability, Coordination, and Governance, to curb its banking crisis.
Renzi demanded flexible budget deficit targets (Blyth, 2014). However, this request was rejected as the proposed flexible budget posed a threat to economic recovery in Europe (Blyth, 2014). This disparity indecision created a deadlock in the EU causing tension among countries like France, Italy, and Germany with other EU members.
The main reason that led some of the countries to move for flexible budget demand was due to the rising debt-to-GDP ratio. The main aim of the austerity measures was to reduce public debt and increase investor confidence, both of which remained unachieved by the policy (Blyth, 2014). Debt levels in some countries like Greece, Portugal, and Ireland have dangerously inflated; thus, shrinking their economy (Blyth, 2014).
The logic behind budget austerity was to induce people to expect tax-cut in future, which in turn would encourage them to spend more. However, this has not happened in Europe. Dampened consumer demand was due to the liquidity crisis in Europe. Therefore, the issue that plagues the European economy is not its inflating public debt but lies in the failure of its banking system (Blyth, 2014).
Blyth (2014) points out in the article that the banking crisis in the EU that began in late 2011 has been the real reason for the stagnation. The issue arose due to over-lending by big European banks, as was the case in the US. However, the EU is not a country. It shares a common currency, but it does not have the potency to bail out banks in case of a banking crisis.
Thus, these banks faced a liquidity crisis in 2011 and 2012. The only way left for the banks to recover by inflating or deflating the currency. However, the negative side of this move was inflated public debt. Thus, the EU realized that the banking crisis had to be solved first to bring back economic growth.
Comment and Conclusion
The article clearly shows that the demand for flexible budgetary policy by Italy is erroneous, as this will not address the root cause of economic stagnation. The European economy has been in stagnation since 2011, and the main cause of the issue was the lack of liquidity with its banks. The crippling of the banking system was curbing growth. An austerity measure has its negative effects, but it is the only means to tackle the issue of liquidity, especially when the EU does not hold the option of bailing out its banks.
Blyth, M. (2014, July 14). Europe’s Goldilocks Dilemma. Foreign Policy. Retrieved from http://www.foreignpolicy.com/articles/2014/07/14/europe_goldilocks_dilemma_austerity_growth