"It is clear that governments should be careful in their assumption that growth alone will be able to end the crisis. Instead, today's advanced country governments may have to look increasingly to the approaches that have long been associated with emerging markets, and that advanced countries themselves once practiced not so long ago," they said.
Delving into the realms of history, they detail the widespread default by both advanced and emerging European nations on World War I debts to the United States during the 1930s. The research suggests that "collective amnesia" of this history has led to current policies that in some cases risk exacerbating the final costs of deleveraging.
The economists suggest that there are five different outcomes in dealing with this debt and highlight a "prototype" recovery period from their previous research. Economic growth is discounted as being too rare by both economists and austerity packages (as seen in Europe since the financial crash of 2008) are deemed as being insufficient. Instead, the size of the problem suggest that debt restructurings would be needed, they add, particularly in the periphery of Europe. The solution they propose, based on a typical sequence of events in history, shows some combination of capital controls, financial repression (like an opaque tax on savers), inflation, and default.
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