Commentary
The Russian army is not currently struggling to recruit new contract soldiers, though the number of people willing to go to war for money is dwindling.
Dmitry Kuznets
{
"authors": [
"Uri Dadush"
],
"type": "other",
"centerAffiliationAll": "",
"centers": [
"Carnegie Endowment for International Peace"
],
"collections": [],
"englishNewsletterAll": "",
"nonEnglishNewsletterAll": "",
"primaryCenter": "Carnegie Endowment for International Peace",
"programAffiliation": "",
"programs": [],
"projects": [],
"regions": [
"Western Europe",
"France",
"Germany"
],
"topics": [
"Economy"
]
}
Source: Getty
Other
Recession in Europe
The festering sovereign debt crisis in the eurozone and its many repercussions on government spending and bank lending mean that the probability that Europe will experience a recession this year is high.
By Uri Dadush
Published on Jan 26, 2012
What is the likelihood that Europe will experience a recession this year and what steps can policymakers take to prevent it?
The festering sovereign debt crisis in the eurozone and its many repercussions on government spending and bank lending mean that the probability that Europe will experience a recession this year is high—despite recent slightly encouraging data on purchasing intentions. The recession could be mild under a business-as-usual scenario or extreme if the eurozone unravels.
Measures that policy makers could take to mitigate the recession (though it may be too late to prevent it as large economies cannot turn on a dime) come under four headings. In rough order of importance, they are:
1. Build a firewall to reassure investors that Italy and Spain will be protected—in my view this requires adding about a trillion dollars to IMF resources and another trillion dollars to the combined European rescue funds. These are large sums designed to ensure that Italy and Spain can fund their maturing debts and ongoing primary deficits for three years, giving them time to adjust under strict IMF supervision.
2. The European Central Bank should cut its policy rate to zero, continue to provide and expand its three-year lending facility for banks as needed, and continue to provide a temporary and limited backstop to buy government bonds while the expanded IMF-EU facilities are being put in place.
3. Germany, the Netherlands, and other European countries with large current account surpluses should expand government spending and/or reduce taxes and encourage higher wage settlements.
4. Structural reforms must accompany the budget cutting that is an inevitable part of nursing the periphery back to health. These reforms are needed to reestablish competitiveness in the periphery and reignite its growth. Even though they can take a long time to work, their effect on confidence in the short run is considerable.
A depreciation of the euro will also help mitigate the European recession and restore the competitiveness of the periphery. In addition, Europeans will need help from the rest of the world, both in the form of support for expanded IMF facilities and in increasing demand for their exports. The United States should contribute to expanded IMF facilities, contrary to its present stance, because the fund is an insurance policy against a possible global depression that would hurt all Americans.
Measures that policy makers could take to mitigate the recession (though it may be too late to prevent it as large economies cannot turn on a dime) come under four headings. In rough order of importance, they are:
1. Build a firewall to reassure investors that Italy and Spain will be protected—in my view this requires adding about a trillion dollars to IMF resources and another trillion dollars to the combined European rescue funds. These are large sums designed to ensure that Italy and Spain can fund their maturing debts and ongoing primary deficits for three years, giving them time to adjust under strict IMF supervision.
2. The European Central Bank should cut its policy rate to zero, continue to provide and expand its three-year lending facility for banks as needed, and continue to provide a temporary and limited backstop to buy government bonds while the expanded IMF-EU facilities are being put in place.
3. Germany, the Netherlands, and other European countries with large current account surpluses should expand government spending and/or reduce taxes and encourage higher wage settlements.
4. Structural reforms must accompany the budget cutting that is an inevitable part of nursing the periphery back to health. These reforms are needed to reestablish competitiveness in the periphery and reignite its growth. Even though they can take a long time to work, their effect on confidence in the short run is considerable.
A depreciation of the euro will also help mitigate the European recession and restore the competitiveness of the periphery. In addition, Europeans will need help from the rest of the world, both in the form of support for expanded IMF facilities and in increasing demand for their exports. The United States should contribute to expanded IMF facilities, contrary to its present stance, because the fund is an insurance policy against a possible global depression that would hurt all Americans.
Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
More Work from Carnegie Endowment for International Peace
- Does Russia Have Enough Soldiers to Keep Waging War Against Ukraine?
- Taking the Pulse: Can the EU Attract Foreign Investment and Reduce Dependencies?Commentary
EU member states clash over how to boost the union’s competitiveness: Some want to favor European industries in public procurement, while others worry this could deter foreign investment. So, can the EU simultaneously attract global capital and reduce dependencies?
Rym Momtaz, ed.
- To Survive, the EU Must SplitCommentary
Leaning into a multispeed Europe that includes the UK is the way Europeans don’t get relegated to suffering what they must, while the mighty United States and China do what they want.
Rym Momtaz
- The Trump-Modi Trade Deal Won’t Magically Restore U.S.-India TrustCommentary
Washington and New Delhi should be proud of their putative deal. But international politics isn’t the domain of unicorns and leprechauns, and collateral damage can’t simply be wished away.
Evan A. Feigenbaum
- From Loss and Damage to Climate Mobility ActionCommentary
Senior climate, finance, and mobility experts discuss how the Fund for Responding to Loss and Damage could unlock financing for climate mobility.
Alejandro Martin Rodriguez
