Expansionary Economics

European politicians are advocating Keynesian economic policies that would enable struggling countries to grow their way out of trouble. The Keynesian approach has two strings.

1. Monetary Policy
   Many economists believe that expanding the supply of money will contribute to an increase in economic growth. The main transition mechanism is reducing interest rates and making borrowing cheaper. This will encourage businesses to increase investment.
   
   Nominal interest rates cannot go negative, so when they reach zero, other methods have to be used. Quantitative easing is one method. Dropping dollars bills from a helicopter is another (it has not been used yet).
   
   
2. Fiscal Policy
   When governments spend more than they take in tax revenues to expand the economy, this is called fiscal policy.
   
   The Keynesians argue that fiscal policy can support monetary policy, during times when confidence is lacking. When businesses and households are unwilling to borrow, despite low interest rates, the government should borrow from the banking system to support its fiscal deficit. This transforms the increasing money supply into an increase in aggregate demand, which is supposed to contribute to economic growth.

Many European politicians want to replace the existing austerity with expansive Keynesian policies. The problem is that the countries of southern Europe have not implanted austerity policies. Their governments have been spending far more than they get in taxes for the past tent to twenty years. They have had expansive fiscal policies forever. They have had expansive monetary policies for the last five years.

The balance sheet of the Federal Reserve and the European Central Bank have grown rapidly due to the expansive policies that were introduced to correct the Global Financial Crisis. Spain, Greece, Portugal and Italy have had expansive Keynesian policies operating for the last five years. (Even after most of their debt has been cancelled, the Greek government has been spending more than it collects in taxes. It needs loans from other countries to continue at the current level).

This is not austerity.

The countries of southern Europe have had Keynesian, expansive policies for several years, but they have not worked. It is hard to see how more government expansion will solve the problem, when it has not worked already, and is quite likely they cause of the problem.