about the transmission of fiscal tightening in Europe, Mr. Krugman recalls the good old model and actually proposes not to look for the best having good – ie. suggests using a well proven approach to understanding / analyzing the situation.
from Krugman in free translation:
fiscal tightening in one country under a floating exchange rate system leads to a decrease in economic activity in the world. The reason: reduction in government spending leads to lower rates, leading to devaluation, which leads to an increase in exports, which partially neutralizes the effect of reducing government spending, but also transfer part of the recession to the outside world. finally, it will not be quite so, but somehow similar by results.
not sure, that our reality fits into the framework of Mandela-Fleming, but you shouldn't lose sight of the correct logic in general. those times, many believe, that the growth of exports from the Eurozone will override the effect of reducing government spending.
this would be true for a small country (suitable for a 'small open economy'). there are problems with such a giant as the Eurozone / EU. they, these problems lie in the plane of heterogeneity of the Eurozone itself, the impact of government spending cuts on aggregate demand in the global economy, plus we need steady growth in other regions. and here's another nuance. what is exported? rather then, which depends on the demand for investment and the price elasticity of these products is relatively limited. but the growth rates are just very.
eventually, whatever one may say and what where do not substitute, spending cuts will reduce business activity in the global economy in the short term. how much other factors will obscure it, here it is already necessary to count / estimate.
