I have been saying that austerity would make life very difficult as it might shrink each practicing nation's GDP. Resulting in higher unemployment. So, I have graphed the cumulative change in GDP quarter 1 or 2008 through quarter 4 of 2011, against the cumulative change in government spending over the same time period.
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| Austerity |
The graph plots data points and regresses to the mean. Unless I'm interpreting it incorrectly, there's a direct relationship between government spending and GDP. This graph shows that in countries where the government actively spends, GDP is higher. The implication is clear: Greece should NOT use austerity measures to pay back their debt.
I think debt forgiveness is the answer for Greece. If Greece is removed from the EU and creates its own currency, I think Greece will see Zimbabwe like inflation.
A HT to Wayne for his sedulous work on this graph that makes us all better.
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