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I would like to make a few points about a debate that has not been helpful and has risked to erode the confidence that we have painstakingly built up over the past years in numerous late-night meetings. I am referring to the debate about the fiscal multiplier, i.e. the marginal impact that a change in fiscal policy has on economic growth.
The debate in general has not brought us much new insight. Multipliers are larger when households are highly indebted and when interest rates are low. On this, there was already consensus among economists. Beyond that, the recent studies' robustness is limited by their rather short time horizon, and the fact that it cannot be excluded that other factors impacted on growth compared with what was expected in forecasts around 2010 and 2011.
One reason to question the analysis present in these studies is that such growth forecast errors may arise either because the impact of fiscal change (the multiplier) was estimated with error or because the size of the eventually implemented fiscal change was different from the forecast, or both. In our view, the analysis is not robust enough to distinguish this...
A second reason is that the period under analysis, namely the early years of the crisis, included both the growth effect of fiscal consolidation and that of fiscal stimulus. Both the Commission and the IMF have found that the biggest growth forecast errors occurred in 2010, when most countries were implementing temporary fiscal stimulus measures after the huge fall in activity in 2009, rather than consolidation measures. Likewise, the 2009-10 stimulus measures could have a larger impact only because it was expected they would be phased out again. Consolidation that is accounted as permanent and perceived as credible tends to be associated with a smaller multiplier than temporary measures...
The situation across countries varies considerably. This is why the Commission applies a differentiated approach to consolidation, taking into account the respective challenges of each and every Member State when determining the required fiscal adjustment effort.
Each country's consolidation effort is specified in so-called structural terms, which means removing the effects of the business cycle and one-off measures on the budget. If growth deteriorates unexpectedly, a country may receive extra time to correct its excessive deficit, provided it has delivered the agreed structural fiscal effort. Such decisions were taken last year for Spain, Portugal and Greece.
Yet, we have to recall that public debt in the EU has risen from around 60 per cent of GDP before the crisis to around 90 per cent of GDP. And it is widely acknowledged, based on serious academic research, that when public debt levels rise above 90 per cent they tend to have a negative impact on economic dynamism, which translates into low growth for many years.
That is why consistent and carefully calibrated fiscal consolidation remains necessary in Europe. And that is why it is important that the debt criterion was upgraded in the six-pack. Accordingly, we will have to decide on the Member States' medium-term objectives during the spring.
There is a convincing economic and political case for maintaining a steady consolidation pace throughout the ups and downs of the cycle. The EU's reinforced Stability and Growth Pact ensures the balance sheet adjustment necessary to support confidence in country-specific circumstances, while providing a safeguard in case of unforeseen growth shortfalls.
The stability culture embodied in Europe's reinforced economic governance does not stand in the way of sound, long-term growth. To the contrary: Carefully calibrated fiscal consolidation in a credible medium-term horizon creates the conditions for sustainable growth for years to come.