13 March 2013

ECFIN Economic Brief: The debate on fiscal policy in Europe - Beyond the austerity myth

Several criticisms of the current fiscal strategy in the EU have recently been forcefully expressed. In this brief, authors Marco Buti and Nicolas Carnot examine these criticisms, and provide some clarifications and responses. (Includes link to comment from Simon Wren-Lewis.)

The authors recall that large adjustments are needed in most economies to restore sustainable fiscal positions, not because of the arbitrary will of the markets or of EU institutions. They then examine the debate over the precise speed of fiscal consolidation, which blends arguments over the short-run growth effects but also over the various possible costs and problems of no-consolidation.

In practice, fiscal policy recommendations under the EU framework have struck a balance between the conflicting considerations. Overall, the authors argue that the current EU fiscal strategy is essentially in line with the approach favoured by other international organisations. The EU fiscal recommendations are not an ideological call for austerity at all costs. In general, the flexibility embodied in the rules is being used within a "steady structural" strategy. Attention is also being paid to softening the consequences of fiscal adjustments, and fostering the return to sustainable growth and jobs, through a careful design of fiscal consolidation packages, structural reforms, and a restoration of functioning financial channels.

Finally, a differentiated fiscal consolidation is part of the rebalancing process at work within the euro area, whereby the efforts of vulnerable euro area countries should be matched by rebalancing trends and appropriate policies in countries that feature large current account surpluses.

Full brief

Comment from Simon Wren-Lewis, 30.3.13

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