Andrea Terzi, Professor of Economics, recently published new articles in two academic journals. Both pieces focus on European policies and analyze issues with the current economic situation.
In the 2016 third quarter issue of the PSL Quarterly Review, Terzi offered a critique of an article published previously there, advocating a fiscal expansion over tactics proposed by other researchers to end deflation in the Euro area.
The April 2016 issue of the European Journal of Economics and Economic Policies published Terzi's article, “A T-shirt model of savings, debt, and private spending: lessons for the euro area.” In his article, that elaborates on an earlier INET presentation in Paris, Terzi explains why Eurozone policies have so far failed to restore economic prosperity. Terzi proposes a simple model to study the financial conditions for economic growth in Europe. On the basis of his model, he concludes that fiscal expansion is the "necessary and sufficient condition to end the prolonged deflation in the euro area in a sustainable way.”
The reference to a T-shirt references a saying in Physics that theories of the universe are not credible if their fundamental building blocks cannot be condensed onto a T-shirt. Terzi, in a similar way uses a simple three-equation model to illustrate what is known about the causes of private spending in a monetary economy.
When asked to summarize his work, Terzi stated,
“First, I introduce the notion of the ‘savings–debt constraint’. Every penny saved is someone else's debt. And this means that any policy that inhibits debt also inhibits financial savings, spending, and jobs. Economic growth in a monetary economy inevitably builds on some form of debt. Hence, the way you finance growth is through a balanced and sustainable expansion of private and public debt. In this respect, the EU Commission’s belief that it is possible to create jobs without creating new debt underscores a serious conceptual fault and a delusion that the savings–debt constraint to spending can be ignored.
"Second, I provide a solution to the conundrum of the consequence of savings in a monetary economy. Economics students are familiar with the fact that textbooks are often ambivalent on this issue: In one chapter, savings are good because they fund investment. In another chapter, savings are bad because they depress business sales. I believe I brought some clarity to this issue.
"Finally, I make a strong case for reclaiming the fiscal instrument in the context of European economic governance. As long as policy-makers defy the savings–debt constraint, the euro area will continue to live dangerously.”