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Forum: Common monetary policy with uncommon wage policies: Centrifugal forces tearing the euro area apart

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Extraordinary actions taken by EU governments and the European Central Bank (ECB) averted a catastrophe. However, while these actions are acknowledged to be Keynesian, ›we are not all Keynesians now‹. Little has changed in the decision makers' minds. Numerous statements emanating from the ECB and the EU Commission make this point crystal clear. It is worth quoting the opinion of J. Stark, a member of the ECB Board:

»There is no doubt that the exceptional fiscal policy measures and monetary policy reactions to the crisis have helped to stabilize confidence and the euro area economy. Following the substantial budgetary loosening, however, the fiscal exit from the crisis must be initiated […] to be followed by ambitious multi-year fiscal consolidation. This is necessary to underpin the public's trust in the sustainability of public finances. The Stability and Growth Pact constitutes the mechanism to coordinate fiscal policies in Europe. […] Sound and sustainable public finances are a prerequisite for sustainable economic growth and a smooth functioning of Economic and Monetary Union.« (ECB 2010: 7)

The revival of pre-crisis instincts is manifest also in discussions about ›exit strategies‹, and hurried fiscal consolidations already underway throughout the EU. According to the European Commission's 2010 Spring Economic Forecast, EU public consumption is projected to rise by about 1% in 2010 and hover around zero in 2011 (it used to rise by more than 2%). The general government's primary deficit in the euro area is projected to fall from 3.6% of the GDP in 2010 to 2.9% in 2011. Interestingly, the fiscal stringency in the USA will be very symbolic, with the primary deficit/GDP ratio dropping from 7.2% in 2010 to 6.8% in 2011. Public consumption in the USA does not show any signs of restraint: it is to rise by 2.3% and 2.7% in 2010 and 2011, respectively. These characteristics should be seen in the real context: GDP growth is expected to remain weak in Europe – and to rise fairly vigorous in the USA.

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