The seasonal pathologies

For decades the IMF’s best known recipe for troubled economies was loans in return for a fiscal consolidation commitment. It is now refreshing to see that even the IMF is advising that without growth, there is no practical way out of the European debt crisis. It is a simple question of mathematics. There are two main indicators of a country’s fiscal health: the current account balance, and the stock of debt outstanding. Both these quantities are usually then divided by the gross domestic product to produce the yearly budget deficit ratio and the Debt/GDP ratio. Some European nations have a problem with the first ratio, some with the second, and others are developing a double sickness. Spain, for example has a current account problem; Italy, an inherited huge national debt that stands at well over its GDP. Greece, suffering from a combined problem, had to restructure its debt with IMF and EU help. Fiscal restraint works better in case one, where a few years of low budget deficits can cure the economy. Italy has the second problem, which requires a double cure. The budget deficits haven’t been a problem for several years, and in fact there have been a number of primary surplus years, and this year an overall surplus is expected; however, the Debt/GDP ratio will hardly budge as the economy is expected to once again shrink. The only way for the “Italys” to reduce this ratio is to start growing again, having virtually stopped ten years ago.