Europe’s problem today: Economic policies should reduce neither demand nor supply

- "European countries (euro zone, United Kingdom) have decided to rapidly trim their fiscal deficits. This is being done in a situation where the balance sheet adjustment is not completed, and where private demand accordingly is sluggish."
- "It therefore seems logical to avoid reducing private demand by reducing fiscal deficits, which would lead to even more pronounced underemployment."
- "But the key problem for most European countries is weak long-term (potential) growth, due to population ageing and low productivity gains. So the countries must also avoid a negative impact on supply (of goods and labour) when reducing their fiscal deficits."
• "They must therefore be able to reduce their fiscal deficits without reducing demand and without reducing supply; which leaves them with only two options:
• cutting useless government expenditure;
• taxing saved incomes, as these savings are not used to finance useful investments (but rather speculative investments)."

Natixis Flash Economics 378 20100727

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