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Is There an Alternative Strategy for Reducing Public Debt by 2032?

Christophe Blot (), Marion Cochard, Jerome Creel (), Bruno Ducoudré, Danielle Schweisguth and Xavier Timbeau ()
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Danielle Schweisguth: Observatoire français des conjonctures économiques

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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 it’s Fiscal Compact. In this paper we fundamentally criticise the debt brake. Firstly, we show that it suffers from serious shortcomings and that its success is far from certain even from a mainstream point of view. Secondly, we show that, from a Post-Keynesian perspective, the debt brake completely neglects the require- ments for fiscal policies of member countries in a currency union like the Euro area. It will prevent fiscal policy from contributing to the necessary rebalancing in the Euro area. Thirdly, we show that 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 behaviour in Germany.

Keywords: Public debt; Growth; European macroeconomic policy (search for similar items in EconPapers)
JEL-codes: E47 E61 E62 (search for similar items in EconPapers)
Date: 2014
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Published in Panoeconomicus, 2014, vol. 61, pp.59-78

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