The four fallacies of contemporary austerity policies: the lost Keynesian legacy

The contemporary wide-scale austerity measures are likely to fail in most countries. The first fallacy derives from the false diagnosis that the present crisis is the outcome of lax public spending policy, when it is actually the outcome of a private credit-led speculative boom. The second fallacy assumes the possibility or even the generality of the so-called 'expansionary fiscal contractions': this neglects the short-term negative effects on domestic demand and overestimates the generality of Ricardian equivalence, the importance of 'crowd in' effects related to lower interest rates and the positive impact on trade balances. The third fallacy 'one size fits all' is problematic since Greece and Portugal cannot replicate the hard-won German success. Their productive, institutional and political configurations differ drastically and, thus, they require different policies. The fourth fallacy states that the spill over from one country to another may resuscitate the inefficient and politically risky 'beggar my neighbour' policies from the interwar period.