From austerity to stagnation how to avoid the deflation trap

Five years after the beginning of the financial turmoil in 2008, the euro area is still in crisis. However, there are some positive signs which have emerged. Some say that the main imbalances are on their way toward resolution. Others claim that the euro's survival of what has proven to be a major crisis is a step forward in creating a prosperous and sound European Union. Some may rationalize that the European integration process has always progressed by desperate responses to critical situations. Some may even interpret migration flows from peripheral countries to the core, to escape the misery of the crisis, as showing that the optimality of the currency area has improved. Our analysis of the state of the European Union and the euro area is strikingly different. We think that the policies conducted so far, in particular austerity, have failed and that such a failure has a cost. Imbalances have not been solved but only displaced, from current account to unemployment, from public deficit to inequalities. Despite tremendous efforts, private or public debt ratios are still high and deleveraging still stands as the only objective. A large majority of European citizens live in countries still stuck in the crisis and for whom recovery is an abstract concept (table and Figure 1). We think that alternative policies were possible. In addition, we believe that other policies can and should be implemented now to really exit the crisis.