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Kickstarting real growth the challenge as Europe desperately seeks stimulus

If austerity is no longer the plan, how will Europe stimulate growth? Governments that have money can fund their own stimulus programmes. The classic example is the US in the 1930s where Roosevelt funded roads, buildings, dams and even art projects in an effort to end the Great Depression.

Closer to home, the car scrappage scheme that subsidised buyers with state funds was a recent example of a stimulus scheme in action. So were tax breaks for investing in hotels and nursing homes, or developing flats in seaside towns.

Growth is good. The problem is that these schemes have to be paid for. It's a huge challenge for governments in countries like Ireland or Spain that are already spending more than they take in every year in tax.

Europe can help and the European Investment Bank, for example, is becoming more active in putting capital to work in the Irish economy.

The easier alternative is a digout from central banks.

Such a policy would see central banks pumping more and more cash into the economy in the hope it triggers a lift in consumer spending, that revives business and ultimately feeds back to government in the form of a bigger tax take.

The US and Japan and to some extent the UK have already been doing this.

It can happen in two ways. The most obvious is by cutting interest rates so that it becomes cheaper to borrow.

Lower interest rates mean greater access to cheaper loans. That encourages households and businesses to spend money today instead of next month or next year.

Cheap car loans means more cars on the road, that means more jobs in car factories and more tax in state coffers.

Official interest rates are already low though, but the cuts from Frankfurt are not translating into a credit splurge here.

Option two is so called quantitative easing (QE).

It is a more roundabout way of getting cash from the Central Bank into the economy by buying assets.

Because they control money supply, central banks – in our case the European Central Bank – can in very simple terms make more as they need it. They can use the cash they create to buy real assets. The money funnelled to the sellers of those assets eventually makes its way into the economy.

The big fear with all this is that instead of fixing the economy, all this loose money makes it worse. In the past 20 years, here we've seen both sides of stimulus policies.

European structural funds built roads and that helped lift the Irish economy while tax break-driven property speculation and cheap debt helped sink it.

Irish Independent