The Expansionary Fiscal Consolidation Theorem in Doubt: Its Tragic Implications and Why It Should Be Avoided

Konstantinos J. Hazakis ()
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Konstantinos J. Hazakis: Democritus University of Thrace

A chapter in The Political Economy of Development in Southeastern Europe, 2018, pp 3-15 from Springer

Abstract: Abstract Expansionary fiscal consolidation (or expansionary fiscal contraction, EFC) is the fundamental macroeconomic policy framework of the euro area. EFC argues that a carefully designed fiscal consolidation could lead to increases in aggregate output and consumption of firms and households through shifts in fiscal policy (expenditure and tax changes). Further, it is suggested that the higher the initial fiscal spending to GDP ratio, the greater the expansionary effect of fiscal spending reductions. The aforementioned argument is completely different from a Keynesian perspective, according to which a reduction in government expenditures or more taxation have contractionary effects on aggregate demand. This chapter analyses the theoretical pillars of EFC thesis and assesses its implications in specific countries of the euro area in the period 2010–2016. It is argued that permanent fiscal consolidation is detrimental to economic growth in the euro area economies. This chapter is organized as follows: after a brief introduction, Sect. 2 analyses the pillars of EFC thesis and discusses its main weaknesses. Section 3 analyses the effects of the EFC thesis on key macroeconomic variables in selected eurozone states, and Sect. 4 concludes.

Keywords: Economic adjustment; Eurozone; Institutional economics; European economic governance; Fiscal consolidation; E14; E62; E65; F32; H60; P16 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:spr:conchp:978-3-319-93452-5_1

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DOI: 10.1007/978-3-319-93452-5_1

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