Liberalism in Crisis?
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Liberalism in Crisis?

European Economic Governance in the Age of Turbulence

Edited by Carlo Secchi and Antonio Villafranca

During the current economic crisis recurring questions on the validity of the liberal economic system have resurfaced concerning the role of the state and the free market, the proactive use of fiscal policies, economic nationalism, and environmental sustainability. However, due to the depth and scope of the crisis new emphasis is being placed on these issues. This book attaches great importance to the specific consequences for the European Union by addressing critical themes surrounding its role in the new era of global economic governance. These include the coherence of common monetary policy with national fiscal policies, new financial regulation and supervision, and the future sustainability of national rescue plans and their compatibility with ambitious targets, such as those addressing climate change.
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Chapter 6: Beyond the Current Crisis: How Should Europe Deal with Government Deficits and Public Debt in Future?

Fabian Zuleeg and Hans Martens


Fabian Zuleeg and Hans Martens 1. INTRODUCTION The current financial crisis, triggered originally by the sub-prime crisis in the US, has necessitated many governments around the world taking over banks’ assets and liabilities and guaranteeing debts. Governments have responded to the ‘credit crunch’ by injecting capital into the financial sector to combat the lack of lending. By the end of 2008, the financial crisis had clearly spilled over into the real economy, with most economies being hit by lower growth. Europe and the US have moved into recession, accompanied by a marked deterioration in labour markets. In response to the deteriorating economic environment, many governments have put together fiscal stimulus programmes, in essence cutting taxes and/or increasing government spending. These government responses to the financial sector crisis have required large injections of capital and governments taking over bank liabilities. At the same time, the fiscal stimulus, in combination with the deteriorating real economy, has led to a deterioration of public finances. This has largely been financed by increases in government debt with the deficit and debt situation likely to deteriorate further in the coming months. Instead of focusing on the current crisis,1 this chapter examines the long term implications of the crisis for European fiscal policy. In particular, it argues that the long-term focus of the EU should be on reinforcing the need for more ‘prudent’ public finances once the current crisis has passed. 148 Government Deficits and Public Debt 149 1.1 The Impact of the Crisis on Public...

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