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CESifo Working Paper Details

Austerity, Growth and Inflation. Remarks on the Eurozone's Unresolved Competitiveness Problem

Hans-Werner Sinn (Website)

CESifo Working Paper No. 4086 (January 2013)

Primary CESifo Category: [6] Fiscal Policy, Macroeconomics and Growth

While the financial protection measures enacted by the ECB and the community of Eurozone members have calmed financial markets, they have left the competitiveness problem of the Eurozone’s southern countries and France unresolved. The paper compares price inflation before the crisis with the necessary and actual price cuts that have taken place since the outbreak of the crisis, predicting a decade of stagnation for the south and inflation for the north. Keynesian demand policy is counterproductive in the south and unnecessary in the north. The necessary realignment of relative goods prices and current account imbalances can be achieved if market forces are allowed to redirect capital flows to the north instead of being artificially steered to uses they are keen to avoid.

Keywords: competitiveness, inflation, realignment, Keynesian policy

JEL Classification:
[E310] Price Level; Inflation; Deflation
[E610] Policy Objectives; Policy Designs and Consistency; Policy Coordination
[E620] Fiscal Policy
[F310] Foreign Exchange
[F320] Current Account Adjustment; Short-term Capital Movements
[F340] International Lending and Debt Problems
[H620] National Deficit; Surplus
[H630] National Debt; Debt Management; Sovereign Debt

Additional CESifo Category:
[7] Monetary Policy and International Finance

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