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Germany’s debt brake is not a model for Europe

September 6, 2016 by andrew36 Leave a Comment

My IMK colleagues Christoph Paetz, Katja Rietzler and Achim Truger have just issued an important analysis of experience with the German Schuldenbremse (debt brake) since 2011. If you read German I heartily recommend you to consult it. We will prepare an English translation, but given the importance of the debt brake for the fiscal policy discussion in Europe (and the fact that quality technical translations take time) let me summarise the main points of interest for European readers here.

The first key mesage is that the apparent successes of the debt brake – the over-fulfilment of fiscal targets, rapid consolidation and emulation by other EU governments under the fiscal compact – are in fact a mirage. The consolidation outcomes, in particular the fact that Germany has posted fiscal surpluses for the past two years, result from the favourable economic and labour market development in Germany, especially the unexpectedly rapid bounce-back from the Great Recession. On top of this came substantial savings in interest payments due to the fall in interest rates, as much of the remaining euro area was mired in recession and the ECB pulled out the monetary stops.

The second, more fundamental point is that the favourable business cycle since the introduction of the debt brake has so far concealed its most insidious danger. [Read more…]

Filed Under: Commentary Tagged With: cyclically adjusted, debt brake, Fiscal Compact, fiscal policy, GDP, Germany, IMK, multiplier, output gap, Schuldenbremse, structural balance

Same ECB medicine, higher dosage – good but more needed

March 12, 2016 by andrew36 Leave a Comment

The ECB has announced a further expansionary shift by beefing up a range of existing policy instruments. Barring unexpected positive shocks this will not be enough to break out of a deflationary environment and convincingly underpin growth and a rapid reduction in unemployment. For that to happen fiscal policy must turn expansionary and/or the ECB must cast caution to the winds and adopt new tools. At the press conference following the policy announcement ECB President Draghi gave a tantalizing glimpse that new tools may indeed be on the way: we may yet see monetary financing of fiscal policy, or helicopter money as it is popularly known. [Read more…]

Filed Under: Analysis Tagged With: ECB, fiscal policy, helicopter money, inflation, interest rates, Mario Draghi, monetary financing, nominal GDP, QE

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  1. Mainly macro (Simon Wren-Lewis)
  2. Paul Krugman
  3. econoblog101 (Dirk Ehnts)