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It’s time Europe stopped fetishising fiscal discipline

We should prioritise more important outcomes - like creating well-paid green jobs and lifting millions out of poverty


This piece was originally published in the Financial Times as a letter signed by 142 economists, read the letter here.

Contrary to the argument set out by Wolfgang Schäuble (Opinion, June 3), we believe the social fabric of Europe cannot endure a return to fiscal as usual” — the failed austerity policies of the past that transformed the 2008 financial shock into a prolonged recession. We need a new approach to fiscal policy, starting with a recognition that too little deficit spending can cause irreversible social, economic and environmental damage.

When the private sector is struggling, fiscal discipline” can prompt a permanent fall in aggregate demand and output, which unnecessarily stifles employment and household incomes, while leaving future generations worse off.

Europe’s most recent experience of fiscal consolidation failed on its own terms, resulting in higher ratios of debt to gross domestic product due to permanent economic scarring and associated reductions in tax revenues.

Fiscal discipline, not expansion, widens the gulf between rich and poor (particularly in a downturn). Regressive taxes and deep spending cuts in Europe dismantled measures that support equitable growth, resulting in higher levels of poverty and inequality. Cuts to public investment also undermine the just transition” and the fight against environmental breakdown and can lead to a wide array of environment-related financial losses.

A decade of unconventional monetary stimulus and missed inflation targets clearly failed to raise inflation expectations, indicating the author’s own concerns about inflation are misplaced. Olivier Blanchard, former IMF chief economist, who is unconcerned about possible inflationary effects, went on the record to correct Schäuble. Philip Lane, chief economist at the ECB, has suggested there is no alarm surrounding transitory inflation stemming from temporary supply side bottlenecks (instead of demand overheating).

Moreover, too little government spending can increase company bankruptcies and lead to less investment in research and development, hurting the supply side of our economies — potentially exacerbating inflationary pressures.

The EU has gone through a decade of demand stagnation, performing well below its productive potential. Inflationary forces of the 1970s are no longer intact, not least because of declining labour bargaining power, changing demographics, high inequality and private debt overhang. Without concerted fiscal expansion to scale-up investment and protect the vulnerable, aggregate demand will remain low and standards of living will stagnate.

Instead of fetishising fiscal discipline, we should prioritise more important social, economic and environmental outcomes — like creating well-paid green jobs, lifting millions out of poverty and implementing green infrastructure projects.

If there is one lesson from John Maynard Keynes for Schäuble it is look after employment, and the budget will look after itself”.

If you back a recovery plan based around great public services, protecting the planet and reducing inequality, please support NEF to build back better.


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