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A T-shirt model of savings, debt, and private spending: lessons for the euro area

Andrea Terzi

European Journal of Economics and Economic Policies: Intervention, 2016, vol. 13, issue 1, 39-56

Abstract: Notwithstanding the modified ECB practice that saved the day, the euro area is failing to restore economic prosperity. The problem is visibly political, yet an effective solution must be economically viable. This essay articulates the reason behind the prolonged deflationary bias of euro area policies by means of a simple (‘T-shirt’) model, where private spending depends on desired savings and sustainable indebtedness. This savings–debt constraint means that any policy that inhibits debt also inhibits financial savings, spending, and jobs. After providing a solution to the conundrum of the consequence of savings in a monetary economy, this essay makes a case for reclaiming the fiscal instrument. The EU Commission's belief that it is possible to create jobs without creating new debt underscores a serious conceptual fault and a delusion that the savings–debt constraint to spending can be ignored. As long as policy-makers defy the savings–debt constraint, the euro area will continue to live dangerously.

Keywords: eurozone crisis; savings and investment; financial savings; savings–debt constraint; private and public debt (search for similar items in EconPapers)
JEL-codes: E21 E42 E52 E62 H62 H63 (search for similar items in EconPapers)
Date: 2016
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