New Evidence Suggest Austerity May Not Be the Answer

Global policy makers and economists are staging a retrial of austerity as new evidence arises.

Facing another slowdown in the world economy, the U.S. and International Monetary Fund are pitched against the euro area and U.K. over whether axing budgets and debt is the recipe for recovery or recession. In academia, professors Kenneth Rogoff and Paul Krugman remain at odds.

The dispute, which led to finger-pointing and a fight over setting new debt targets at weekend talks of finance chiefs in Washington, is getting a re-airing as economic data from the U.S. to Europe undershoot estimates. Research co-written by Rogoff that has been used to justify cuts has come under scrutiny.

“Delaying necessary adjustments would further aggravate risks for the prospects of a lasting and fundamentally sound global recovery,” German Finance Minister Wolfgang Schaeuble told the fund’s 188 member nations. IMF Managing Director Christine Lagarde told Bloomberg Television that “for some of them there’s no reason to rush into up-front, heavily loaded fiscal consolidation.”

Data this week from U.S. durable goods purchases to the strength of European manufacturing may show the pain of tighter fiscal policy as recession-hit European governments keep cutting to defeat their debt woes and the U.S. deploys across-the-board federal spending cuts, called sequestration. The Standard & Poor’s 500 Index is up more than 9 percent this year, while the Euro Stoxx 50 Index is down more than 2 percent.


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Mingze Wu

Mingze Wu

Currency Analyst at Market Pulse
Based in Singapore, Mingze Wu focuses on trading strategies and technical and fundamental analysis of major currency pairs. He has extensive trading experience across different asset classes and is well-versed in global market fundamentals. In addition to contributing articles to MarketPulseFX, Mingze centers on forex and macro-economic trends impacting the Asia Pacific region.
Mingze Wu