Recent events in Europe have reignited the debate over the effectiveness of government policy interventions and on the question of what stimulates growth. Unfortunately, we can’t look to academia to provide convincing answers. Fierce debates on this topic have raged ever since the 1930’s when John Maynard Keynes theorized that during times of economic slack (recession), government spending could stimulate economic activity and lead to growth. According to the multiplier effect, increased government spending can increase employment and incomes, thereby boosting private consumption and sentiment which in turn increases total spending.


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The uncertain direction of policy within the Eurozone continues to pressure asset prices. The inability of Greece to form a government has resulted in its ten-year debt rising to a yield of 27 percent from just over 20 percent one week ago, before the recent elections. The fear of contagion and disappointment over the official response to weakness in its banking system have resulted in the yield on ten-year sovereign Spanish debt rising to 6.20 percent from 5.70 over the same interim, while Italian bond yields are higher by 25 basis points. After a relatively benign response to the recent elections results, which saw the Euro Stoxx 50 equity index rise fractionally last week, prices turned sharply lower on Monday as the index fell by 2.3 percent. The euro also extended its recent slide in Monday trading, declining to 1.285 to the dollar, down from 1.31 one week ago Friday. And a decline in Eurozone industrial production in March will only add to the sense of malaise, while Tuesday’s release of first quarter GDP results is expected to confirm the onset of recession throughout the region following a decline of -0.3 percent in last year’s fourth quarter.

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"The problem with socialism is that eventually you run out of other people’s money." –Margaret Thatcher

"The individual serves the industrial system not by supplying it with savings and the resulting capital; he serves it by consuming its products."  –John Kenneth Galbraith

Therein lies the dilemma in which Europe finds itself. In today’s circumstance, we could substitute Angela Merkel for the former British prime minister and a chorus of Keynesian economists for Galbraith. Germany is afraid that ultimately it will be on the hook for the profligacy of its southern neighbors who, while repentant, are convinced that the cure of austerity is worse than the disease of insolvency. And now the people have spoken, and to no one’s surprise they have sided with the Keynesians, while the Germans are checking for their wallets.


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