More than two years into the crisis, it is clear that Europe’s fiscal austerity strategy is not working.

Lessons from the euro crisis for the United States

Desmond Lachman

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As the European economy slides ever deeper into recession, it is time for the United States to draw cautionary lessons from Europe’s painful budget adjustment experience, especially as the dismal state of America’s public finances now bears an uncomfortably striking resemblance to that of some of Europe’s more troubled economies. 

Among the more important lessons is that the United States should not be lulled into a false sense of budget complacency by the very-low interest rates at which its government can presently fund itself. 

Rather, the United States should embark upon a serious program of medium-term budget adjustment if it is to avoid going further down the path to fiscal ruin. 

The European experience also suggests that medium-term fiscal consolidation is best effected through public spending cuts rather than tax increases, and that such an adjustment effort should be supported by accommodative monetary policy action. 

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