The euro area is currently going through its worst period of recession and economic stagnation since the Great Depression and World War II. The article tries to give an impression of the extraordinary degree of fiscal austerity and the devastating economic effects it has already had and must be expected to have in the near future. In addition it is argued that both the lack of economic justification and the devastating consequences of the fiscal policies currently executed should have been absolutely obvious even from a mainstream perspective. Therefore the sad state of economic policies in the euro area is that it did not even follow moderate mainstream proposals but instead seemed to rely on radical and outdated theoretical or purely ideological foundations. Germany as the most economically and politically influential member state of the euro area seems to be most infected with such radical ideas.
The implementation of a golden rule of public investment as a necessary institutional reform and an important step aimed at overcoming the constraints imposed by the new European Economic Governance are proposed. The rule is widely accepted in traditional public finance and can deliver both intergenerational fairness as well as more growth and employment. The golden rule would exempt public (net) investment suitably defined from the relevant deficit targets of both the preventative and the corrective arms of the Stability and Growth Pact as well as the Fiscal Compact. That way, fiscal policy would be upgraded and would receive more room for manoeuvre and public investment as a particularly growth-enhancing public expenditure category would be strengthened. Different definitions are discussed and a pragmatic definition based on the national accounts with some modifications will be proposed. The standard reservations against a golden rule are critically assessed and mostly discarded. Although a proper implementation would need some time, this should not be an excuse for not using pragmatic short-term solutions that are readily available at the European level.
‘Economics is not useless. It can either be very harmful, which it often is, or very beneficial’
Eckhard Hein and Achim Truger
Eckhard Hein and Achim Truger
Although growth in the European Union (EU), and in particular in Germany, one of the Euro area's former »sick men«, has speeded up in 2006, the EU and particularly the Euro area continue to face major economic problems. These problems are caused by the restrictive »Maastricht economic policy regime«. To put it shortly, this regime is dominated:
- – by the European Central Bank's (ECB) exclusive focus on price stability and its overly ambitious inflation target,
- – by the lack of fiscal stabilisation imposed by the Stability and Growth Pact (SGP), even in its revised version,
- – and by the focus on structural reforms, particularly in the labour market, which – together with high unemployment – continue to undermine the wage bargainers' ability to set wages with an eye to macroeconomic stability.