The two problems that must be solved by the euro zone

- "To avoid deflation, the euro zone must solve two major problems:
• the high and rising level of household savings, which depresses demand;
• the low level of nominal growth, in the short and medium term, which makes it very hard to stabilise debt ratios."
- "Could economic policies be imagined that would both lower the household savings rate and increase long-term nominal growth?
• a redistribution of unearned income to wages, which could be done via fiscal policy or via income sharing rules. In that case there would be both faster wage growth, less incentive to save due to the fall in the expected return on equity, and higher nominal growth;
• an attenuation of all the persistent uncertainties (concerning pensions, social welfare and the means used to trim fiscal deficits), in order to stimulate both consumption (fall in recautionary savings) and corporate investment;
• a depreciation of the euro exchange rate could be used only if wages were inflation-indexed; otherwise it would reduce wage-earners' purchasing power and increase the savings rate."
Natixis Flash Economics 347 20100705

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