Posts

Did Austerity Fuel Asset Bubbles in the Eurozone and U.K.?

Image
Austerity and the Shift to Monetary Policy After 2008 , the Eurozone and U.K. pursued austerity , cutting public spending and raising taxes. However,  central banks took the lead in stabilising economies. The Bank of England (BoE) and European Central Bank (ECB) introduced ultra-low interest rates and quantitative easing (QE) to prevent deeper recessions. BoE slashed rates from 5% (April, 2008) to 0.5% (March, 2009),  the steepest rate reduction in its history  (BoE, 2023) . The ECB cut its Main Refinancing Operations rate from 4.25% (July, 2008) to 1.00% (May, 2009), before gradually reducing it to 0.00% in March 2016 (ECB, 2023) . The ECB's consolidated balance sheet expanded from approximately €2.1 trillion at the end of 2008 to €3.5 trillion by the end of 2016, reflecting the scale of intervention required to counteract weak demand. ( ECB, 2008 ;  ECB 2016 ) These measures prevented immediate financial collapse and stabilised sovereign debt markets. Howeve...
Post a Comment
Read more

Did Stimulus Prove More Effective Than Austerity After 2008?

Image
The Policy Divide The 2008 Global Financial Crisis forced governments into a stark policy choice. The U.S. and China pursued Keynesian stimulus, injecting liquidity into their economies. The U.S. allocated nearly $800 billion via the American Recovery and Reinvestment Act (ARRA, 2009). However, the U.K. and Eurozone generally opted for austerity, slashing spending and raising taxes to curb deficits. The rationale was that fiscal consolidation would restore investor confidence and prevent sovereign debt crises. Did Keynesian Stimulus Work? Keynesian theory argues that government spending boosts demand in recessions, helping to prevent deflationary spirals. However, despite large-scale stimulus in the U.S., inflation remained fairly muted, suggesting that even aggressive monetary and fiscal policies could not fully offset the economic downturn. Why? A liquidity trap, where  banks hoarded reserves, and households prioritised debt repayment over spending, preventing stimulu...
Post a Comment
Read more