Wednesday, December 14, 2011

Can Austerity Work?

The current conventional wisdom claims a resounding "no", but ThinkMarkets believes that, though little reported, there is some evidence that Greece is starting to turn around.
This evidence is not widely known or reported. I heard about it from Nick Kounis, head of macro research at ABN Amro.

He pointed out, at a Capital Link Forum in New York last week, that Greek exports are growing, albeit from a low level. In the past couple of quarters Greek export growth rates outpaced German export growth. The reason, Mr. Kounis said, is that Greek wages declined while German wages increased. This improved Greek competitiveness.

If strong export growth continues, international trade will make up for the fall in domestic consumption as the industrial structure shifts to selling more to the rest of the world. By 2013 greater exports could bring back growth, Mr. Kounis says.

And austerity could work even better if reduced government expenditures resulted in reduced marginal tax rates. But that might be a lesson the Europeans (and, for that matter, the Americans) don't really want us to learn.

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