Greece and Britain Report Positive Signs of Economic Recovery
In the wake of its fiscal crisis, Greece has taken sufficient definitive steps to reduce its budget deficit that it is in line to receive another $11.5 billion in aid from the EU, the Wall Street Journal reported yesterday. The nation's deficit has fallen by almost half -- 46 percent -- since the beginning of 2010, with spending also reduced by 17 percent compared with 2009. The EU Fiscal Commission called these impressive reductions "faster than planned," and applauded them for initiating and achieving significant structural reforms within their government. EU leaders seem to agree with the Greeks in saying that the prospects for stability, reform, and a surging economic recovery are strong thanks to their efforts at fiscal reform and long term sustainability.
Also, in the UK, numbers were released showing that the nation's budget deficit shrank at a faster rate than was expected during the month of July, and retail sales increased significantly as well, indicating a stronger British economic recovery. The news of the shrinking deficit comes in the wake of the nation's recently announced new budget plan, which includes dramatically reduced government spending and increased taxes in an attempt to decrease their ballooning deficit. In an attempt to find ways to even further reduce spending and get the most out of the policies and programs that do exist, the British government has reached out to its citizens, asking for their input on the best ways to cut spending. The British Treasury website has received over 45,000 submissions so far, ranging from the elimination of the monarchy altogether to putting British prisoners to work at government jobs.
The positive retail sales numbers, however, seem to disprove some economists' fears that the slashed government spending would cripple the burgeoning economic recovery in Britain -- providing even more ammunition behind the argument that economic growth and fiscal sustainability can be pursued at the same time and can actually reinforce each other (see our blog on the academic basis for this). Allan Meltzer's op-ed in the Wall Street Journal last week reflected this idea: that clear plans to reduce government spending and to get on sustainable fiscal paths actually helps economic recovery and growth, especially in the long-run. Reminiscent of the Announcement Effect Club, we maintain that a strong commitment to restore fiscal sustainability gradually as the economy recovers can actually encourage growth now because it reassures investors of our economic and fiscal solvency. So it makes sense that, in fact, the pound rose against the dollar after Britain recently released its new budget that is meant to significantly reduce government spending over the coming decades.