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The war on austerity is far from over

In the European Union (EU), relief spread when the German Constitutional Court dismissed the case against the EU Recovery Fund. This was just a battle win, as the war on austerity is far from over. Just wait for the recovery to gather momentum and the fiscal debate will come back with a vengeance.

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In a recent post on his blog, Bill Mitchell reminded us of the economic performance of the US, Australia, and the eurozone in terms of real gross domestic product (GDP) growth from the first quarter of 2008 until the fourth quarter of 2020: US +19.9%, Australia +31.8%, and the euro-19 bloc +3.5%. The prosperity divergences between these three major economic regions will only increase as a result of their current macroeconomic policies (see chart of the week).

China still enjoys a substantial margin to increase productivity and accordingly does not need to aggressively reflate like the US. The US has embarked on a new policy paradigm and I cannot help asking myself whether the eurozone is not in fact laying the groundwork for US prosperity in years to come.

The faster and deeper Europe switches back to balanced budgets and austerity, the longer global capital will support the current US policy trajectory.

The US policy mix shaped by the current administration is not a free lunch, as the US (its central bank, in particular) will face a currency devaluation, rising inflation, a combination of the two, or asset bubbles in the equity and residential real estate markets at some point (though not imminently). Ironically, the faster and deeper Europe switches back to balanced budgets and austerity, the longer global capital will support the current US policy trajectory.

European macroeconomic policy is pulling down the global interest-rate structure together with the Bank of Japan’s explicit yield-curve targeting, limiting the steepening of the US yield curve. Furthermore, the US has embarked on confronting China strategically and neither Washington nor Beijing want to experience stagnation this decade. They are the two growth engines of the world economy for the foreseeable future.

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