Buti, Μ. & Carnot, Ν. (2015) “What is a ‘responsible’ fiscal policy today for Europe?“, VoxEU Organisation, 24 February.
In an uncertain world, fiscal policy must be robust to a range of models. This column introduces a rule of thumb governing fiscal expansion that is consistent for a group of countries, and for each country individually. Applying this rule to the Eurozone recommends overall fiscal neutrality, with moderate consolidation in France and Spain, lower consolidation in Italy, and moderate stimulus in Germany. This policy is optimal for Germany even without taking into account positive spillovers to other members.
Introduction
There is much debate today on the direction that fiscal policy should take in Europe. On one hand, stocks of public debt are higher than ever, calling for long-run fiscal adjustment. On the other, doubts about the subdued recovery push for slowing fiscal consolidation and providing short-term stimulus. There doesn’t exist a clear compass to balance these considerations. And the balance of course may differ with specific country situations.
The European Commission has adopted ‘fiscal responsibility’ as a key pillar of its growth strategy, together with boosting investment and a renewed commitment to structural reforms (European Commission 2014a). Fiscal responsibility has to do with appropriately confronting the current dilemmas, since the Commission at the same time stresses that Member States “still need to secure long term control over deficit and debt levels” while underscoring that consolidation should be “growth-friendly”. The Commission has also judged that concerning the euro area as a whole, a broadly neutral stance emerges from the analysis of country budgetary plans for 2015 (European Commission 2014b). Moreover, while this is deemed to strike an appropriate balance for the overall zone, the country distribution of fiscal policies is judged to be sub-optimal, as “some Member States are called to increase their efforts to comply with the SGP, [which] implies a degree of fiscal support coming from the exploitation of the fiscal space available elsewhere”.
Relevant posts:
- De Grauwe, P. & Ji, Y. (2015) “Quantitative easing in the Eurozone: It’s possible without fiscal transfers“, VoxEU Organisation, 15 January.
- Antonakakis, N. & Collins, A. (2015) “The impact of fiscal austerity on suicide: On the empirics of a modern Greek tragedy“, Social Science and Medicine Journal, Volume 112, July 2014, pp. 39-50.
- Mitchell, B. (2014) “The inexact science of calibrating fiscal policy“, Bill Mitchell Blog: Modern Monetary Theory … macroeconomic reality, 02 December.