Stimulus package financed by eurobond touted

A stimulus package financed by a eurobond is the most economically feasible and effective wayof overcoming the eurozone’s significant challenges, according to UCD professor of economics Karl Whelan.

Mr Whelan was addressing the chairs of the finance committees of 27 EU member states gathering in Dublin yesterday.

His views directly contradict the prevailing orthodoxy across the region, which is to implement austerity policies in periphery countries like Ireland in an effort to restore fiscal rectitude.

“I know these comments won’t be well received by many. I know many of you believe that there is no room for core euro area countries to raise spending. However, borrowing rates for countries like Germany are close to zero and the euro area as a whole has a debt ratio similar to areas such as the UK and the US, where central banks are actively willing to purchase sovereign debt,” said Mr Whelan.

“A eurobond-financed stimulus programme would be economically feasible and effective; the feasibility problem is a political one. The shortfall of spending that afflicts growth and reform in the euro area is largely due to our own unwillingness to use available policy choices to solve our problems.”

He argued that a cut to spending causes a slump in demand for local goods and services, which limits progress on improving the current account.

Speaking at the same event, Finance Minister Michael Noonan, said the solution to the eurozone crisis lay in stoking supply-side fundamentals. “Demand creates supply, but supply also creates demand.” The minister cited iPads and other products that created robust demand when they went on sale. “What we need to do is cut the cost base, improve productivity and product innovation that increases demand.”

However, Mr Whelan challenged this view.

“As a mainstream economist, I agree that many of the eurozone countries currently in difficulty could benefit over time from supply-side reforms in product markets and labour markets. These reforms can improve competitiveness and promote efficiency.

“However, I don’t agree these are the ideal policies to promote growth in debt-distressed countries or that they should be expected to offset fiscal austerity. In general, economists are fairly hopeless at figuring out the size and timing of the effects of supply-side reforms on productivity.

“It is even possible that reforms that have a positive long-run impact can have a negative impact in the short run. For example, reforms to reduce firing costs may have important long-run effects in making it more attractive to hire workers in Spain or Italy. But the short-run impact of these reforms could be to further increase unemployment as firms lay off numbers of workers.”

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