The 10th plague brought an end to solvency issues, but not yet output issues

Interesting how Germany gravitating to negative growth came at about the same time Draghi announced the ECB will ‘do whatever it takes’

With the ECB now taking national govt insolvency off the table, and member nation rates coming down accordingly, the reason for deficit reduction- solvency- has fallen by the wayside.

So now the EU is free to adjust deficits for optimal output without the former solvency concerns.

With austerity, every professional forecaster revises his GDP estimate down and unemployment up.

With a proactive increase in the deficit, whether via tax cuts or spending increases, every professional forecaster revises his GDP estimate up and unemployment down.

And so relaxing the stability and growth pact to maybe a 7% deficit limit from the current 3% limit would result in forecasts for rapidly rising GDP and rapidly falling unemployment. And with the output gap as large as it is the increased economies of scale with expanding output will likely further promote price stability.

Yet it’s not even a passing thought.

So with deficits now likely high enough to support growth from current levels, if they’d only leave them alone, instead, continuing efforts to proactively reduce deficits = continued widening pressure on the output gap.

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