De Grauwe, P; Ji, Yuemei; (2016) Crisis management and economic growth in the Eurozone. In: Caselli, F and Centeno, M and Tavares, J, (eds.) After the Crisis: Reform, Recovery, and Growth in Europe. (pp. 46-72). Oxford University Press: Oxford, UK.

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Abstract

The crisis management set up in the Eurozone after the eruption of the government debt crisis was characterized by two features. The first was the asymmetric adjustment to the current account imbalances that forced the deficit countries into intense austerity without a compensating policy of stimulus in the surplus countries. This led to a deflationary bias that created strong collateral damage on investment, both private and public. The second feature of crisis management was its focus on supply policies. This chapter suggests that supply side policies have insignificant effects, and sometimes even negative effects on long-term economic growth. As a result, together with the negative effects of austerity on investment, it can be concluded that the crisis management in the Eurozone not only exacerbated a demand problem, but also harmed the long-run growth potential of the Eurozone.

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