In the recent European debt crisis the call for solution was quite the opposite: raise taxes, punish the people who were evil to go into default, lower their growth to negative, and whatever other utter economic nonsense professed by Merkel and buddies, as if she was handling her children in kindergarten and not full grown economies with millions of innocent people in them.
In economic school, we learn there are two ways to handle a crisis: cut taxes and increase expenditure (Keynes way, solved the Great Depression) or pour money into the economy (monetary way). That is why we have governments, to manage the first, and central banks, to manage the latter. Both stimulate the economy to produce more and with the excess production you can pay more stuff, including your debt.
Raising taxes doesn’t work because it takes away incentive to invest, extras to consume and generally lowers economic activity. What is worse, it doesn’t even guarantee more money into the government’s pockets, because taxes are often a percentage over the economy’s GDP and the increase of the percentage leads to a reduction in GDP, so the respective product stays the same or gets reduced. So the only change from an increase in taxes is that people get poorer and more miserable.
And Merkel, IMF, BCE and friends know this. They went to the same schools as anyone else!
The way to solve the crisis would have been: 1. to ensure that the government is lean and efficient by reducing corruption and closing dummy tentacles, 2. to remove legal obstacles to efficiency, like allowing unproductive people to be fired, no more jobs for life (topic for another post), 3. to do very specific investments in key points of the economic fabric, like the ship industry in Greece, 4. to organise economic fairs to get more commercial paths for Greek and Portuguese companies, 5. to improve IT systems to ensure a better ability to tax the whole economy and not just the few that can’t escape, etc etc etc etc.
That is btw how Portugal got out of the crisis. They managed because the government took step 2 and the economic fabric took step 4, opened unexploited commercial paths to everywhere, that allowed the country to grow its exports and display the largest economic surplus of its recent history. Not due to the Troika, but despite it!
So why didn’t Merkel and friends require any of it and instead demanded further economic depression? Because it was in their benefit. Germans have benefitted from a lower Euro, which allows them to export more, lower interest rates, as investors bought their cheap debt as a safe haven, etc etc etc. In the mean while, there were unemployed homeless people in Greece dying of cancer without medical care. But that was fair because they didn’t pay their debt?!!! And Germans still vote for Merkel?!!! I would be disgusted of having such a leader. And ashamed to be making my money this way.