Policy Wounds Leave Behind Scar Tissue, 2011–2013

This chapter addresses the troubling legacies left by the global financial crisis: rising government debt burdens and slower economic growth prospects. In October 2009, debt burdens were surging at about an equal pace in the United States and in the euro area. However, growth prospects looked better in the U.S. than in the euro area because the U.S. Federal Reserve had proactively stimulated its economy while the European Central Bank (ECB) had kept monetary policy tight. Policymakers faced a dilemma. Solving the debt problem required governments to undertake austerity measures—raise taxes and reduce spending; but austerity would lower the demand for goods and services, which would cause incomes to fall and further set back growth prospects. Hence, some, including the International Monetary Fund's Research Department, believed it was important to jump-start economic growth.