The idea that there could be any "expansionary fiscal consolidation" in Europe is non longer relevant. But the odds for a genuine fiscal stimulus remain very low.
One of the consequences of a (possible) change in the current political landscape in Europe would be a switch from self-defeating austerity policies towards growth oriented measures. From a renegotiation of the fiscal compact to a "complementary" spending program by the EU, much has been discussed, but there has not been a concrete proposal yet.
One of the reasons why such a debate matters is that the Eurozone crisis is not so much a fiscal crisis as an external account crisis. Tighter fiscal policies can dampen private domestic demand to a point where:
1. fiscal revenues collapse;
2. the current account deficit remains wide, as exports' responsiveness remains low due to structural supply impediments.
This weekend was all about the €200 billion "Marshall" Plan for Europe designed by the European Commission. It would aim at investing in infrastructures and green technologies, using and leveraging funds from the EIB (European Investment Bank). This is not fiscal policy or fiscal stimulus per se, as domestic government spending and tax policies would not be affected. In addition it could not be considered a federal program as funds would not be drawn or channeled through the European Union structural funds.
€200 billion makes up 2.1% of the Eurozone GDP. One-off spending should have to be spread out for several years, as was the case for the original Marshall Plan. This plan amounted to $13 billion during the period between 1948 and 1951: 1.1% of US GDP for the four years. Using Maddison data (see table below), it represented roughly 1.5% of the GDP of Western Europe recipients.
€200 billion today, spread out over 4 years would amount roughly to the equivalent one third of the Marshall Plan.
In addition, the Marshall plan was not a genuine fiscal stimulus. According to a 1991 NBER paper by Delong and Eichengreen (THEMARSHALLPLAN: HISTORY'SMOSTSUCCESSFULSTRUCTURALADJUSTMENTPROGRAM):
Euro zone Marshall plan not substitute for a genuine proactive fiscal policy. would it not substitute for the economic federalism that has been advocated by many economist. But it would mostly focus on structural reforms that would probably not have a strong multiplier impact in the short run. This remains within the boundaries of Germain thinking as recent interview of Angela Merkel by the Leipziger Volkszeitung shows.
So no additional growth impulses?
Our policy to overcome the debt crisis is based on two pillars: first, on a sound financial policy, without which there will be no relief from the debt crisis, which alone is not enough. …/… . New government stimulus programs would not help Europe. What we need are structural reforms. We must remove the barriers to a healthy economic development. In Germany we have yet experienced for themselves how effective sweeping labor market reforms are for real, sustainable growth. I can also imagine that we strengthen the ability of the European Investment Bank yet.
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