Wednesday, November 9, 2022

WSJ: EU Doubles Down on Big Government

WSJ reports:

Unlike during the financial crisis, the eurozone crisis and the pandemic, free-spending governments are on a collision course with the [European Central Bank], which has raised interest rates at its fastest-ever pace to cool inflation. The eurozone’s inflation rate rose to 10.7% in October, a fresh high, while price growth in the U.S. slowed to 8.2% in September.
...The IMF last month urged Europe to cut state spending to support central banks in the fight against inflation
As interest rates go up, firms' cost of capital increases, and fewer investments are made, e.g., in capital equipment, in houses, cars. As spending decreases, incomes also decrease because one person's spending is another's income (this is the "Keynesian Multiplier" in your Macroeconomics class).

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