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Forex Flash: Eurozone austerity, friend or foe? – Goldman Sachs

FXstreet.com (Barcelona) - As austerity has been implemented in the Eurozone, growth has suffered. According to the Economics Research Team at Goldman Sachs, “Fiscal multipliers in the Euro area are likely to have been large, and the fiscal drag on growth in the large Euro area countries in 2012 alone has, on our calculations, been around 1ppt. However, while fiscal tightening has been sizeable, it does not appear to have been above the point where austerity becomes ‘inefficient’ in reducing the deficit owing to its detrimental effect on growth.”

However, the original deficit plans set out by most European countries envisaged a more rapid pace of austerity. In Spain, for example, 2012 fiscal tightening was at some point planned at more than 4% of GDP, rather than the 2% that appears to have actually occurred. Such a rapid pace would likely have proved less efficient in terms of reducing the government deficit. “We expect EU Commission fiscal pressure on individual countries to continue and austerity (albeit less than demanded) to be implemented at the country level. This will lead to further deficit target misses, but still achieve some actual deficit reductions.” they add.

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