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Daniel Lacalle: More Fiscal Stimulus Will Not Solve Europe’s Economic Problems

Submitted by Taps Coogan on the 23rd of May 2020 to The Sounding Line.

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With government debt-to-GDP ratios across the Eurozone (and the world) set to explode higher, Daniel Lacalle, Chief Economist at Tressis Gestión and author of ‘Freedom or Equality,’ recently spoke with Bloomberg to warn that more fiscal stimulus may not be the right approach to restarting Europe’s economy.

Some excerpts from Daniel Lacalle:

“One thing that we have learned in the European Union is that revenue measures (raising taxes) don’t work because when revenues go up and the economy is growing, most governments actually continue to spend as much as they did during the downturn. Furthermore, the level of spending that is untouchable, entitlements, etc… is growing because of the aging of the population, structural levels of unemployment are much higher than in the United States…”

“I think that it is by now pretty evident that the Eurozone, in growth times, does not achieve the level of productivity growth, of earnings, and of GDP growth of comparable economies… It continues to make those countries like Italy and Spain that are hugely indebted, they continue to be very indebted even in growth periods and when things get bad the debt goes further up. So, the European Union needs to change a lot of its policies in order to cement a recovery that is based on the private sector and on growth of productivity. Because, if everything is based on maintaining the levels of excessive government spending at any cost, then what ends up happening is the tax wedge and the burdens of taxation make growth lower, debt higher, and spending almost untouched.”

The same thing can now be said about nearly all developed economies. Prior to the Coronavirus outbreak the US was already on track to overtake Italy’s debt-to-GDP in just a handful of years. With the US rolling out unparalleled levels of stimulus spending, the gap between the US countries like Italy is likely to narrow even faster.

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