Abstract

Many European leaders have advocated growth programmes for Europe’s crisis-stricken countries, meaning in fact debt-financed expenditure programmes. In this note, I will argue that such programmes are not the right medicine, since the Eurozone suffers from aninternal competitiveness problem rather than a temporary lack of demand. They would provide temporary stimulus and relief, but at the expense of postponing the long-term adjustments that are needed to improve the competitiveness of the crisis-stricken countries. Theyare a painkiller that dampens the symptoms but does nothing to cure the underlying illness.What Europe needs is austerity in the south and inflationary growth in the north to improvethe competitiveness of the south and to structurally improve the current account imbalances. However, instead of taking hectic policy actions, what this requires is simply more tolerancetowards market forces that are already working in this direction.The financial crisis has calmed down somewhat, thanks to the fact that the ESM and the ECB stand ready to buy any troubled country’s government bonds if bankruptcy looms, hence shifting the burden of write-off losses, or of transfers aimed at preventing such losses, to the taxpayers of the Eurozone’s still-solid economies. This has provided a respite, but it is not a contribution to a real solution of the Eurozone’s problems.