Fiscal Policy and Rebalancing in the Euro Area: A Critique of the German Debt Brake from a Post-Keynesian Perspective

Eckhard Hein and Achim Truger

Economics Working Paper Archive from Levy Economics Institute

Abstract: The German debt brake is often regarded as a great success story, and has therefore served as a role model for the Euro area and its fiscal compact. In this paper we fundamentally criticize the debt brake. We show that (1) it suffers from serious shortcomings, and its success is far from certain even from a mainstream point of view; (2) from a Post-Keynesian perspective, it completely neglects the requirements for fiscal policies of member-countries in a currency union and will prevent fiscal policy from contributing to the necessary rebalancing in the Euro area; and (3) alternative scenarios, which could avoid the deflationary pressures of the German debt brake on domestic demand and contribute to internally rebalancing the Euro area, are extremely unlikely, as they would have to rely on unrealistic shifts in the functional income distribution and/or investment and savings behavior in Germany.

Keywords: Fiscal Policy; Rebalancing; Functional Income Distribution; Debt Brake; Germany; Euro Area (search for similar items in EconPapers)
JEL-codes: E25 E61 E62 E64 E65 H62 H63 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Fiscal Policy and Rebalancing in the Euro Area: A Critique of the German Debt Brake from a Post-Keynesian Perspective (2014)
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