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Government spending increases growth?

March 20, 2005

There was a interesting BBC News story about the European Union's broken "stability pact" . The big three Euro zone countries, Germany, France and Italy all wants the rules limiting government deficits abolished or made formally meaningless (In practice they have long been meaningless), whereas some smaller countries like Holland, Austria and Finland want the rules to remain-and be enforced. Most likely the big three will prevail.

Anyway, from this BBC News story we can find the following excerpts describing just why Western Europe is in such economic mess:

"The agreement limits the size of a nation's budget deficit and has been criticised for not letting governments boost economic growth by spending more."

"France and Germany have bust the 3% deficit limit in every one of the past three years, and along with Italy are calling for greater freedom to increase state spending. They argue that the rules were put in place when economic growth was stronger and make no allowance for more difficult times. As economies sputter governments are faced with higher costs relating to payments such as unemployment benefits, as well as pressure from voters to act as a catalyst for growth."

But the point is that the big three has been in "difficult times" for years now (In fact current growth is only slightly below their 10-year average) and this is hardly the result of insufficient government deficit spending. It is in fact largely a result of excessive government deficit spending. With this kind of economic thinking still prevailing the EU Commission's goal of making Europe's economy the world's most competitive by 2010 appears outright laughable. At least if we're talking about Western Europe. The low-tax Eastern European economies are experiencing very high growth.

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