European Economic Governance in the Age of Turbulence
Edited by Carlo Secchi and Antonio Villafranca
Chapter 6: Beyond the Current Crisis: How Should Europe Deal with Government Deficits and Public Debt in Future?
6. Beyond the Current Crisis: How Should Europe Deal with Government Deficits and Public Debt in Future? 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...
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