September 30, 2020

Chart of the month

Chart of the month – Europe – Change in the fiscal stance

BY Russell Jones

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Europe’s recovery requires that fiscal policy not be tightened prematurely

… that the mistakes of the post Global Financial Crisis period be avoided

Chart of the month - Europe - Change in the fiscal stance 1


  1. Fiscal policy worldwide has been expanded extraordinarily in response to the pandemic
    • Support to incomes and employment has significantly moderated declines in real activity
  2. However, this has resulted in dramatic increases in public sector budget deficits and debt.
    • Advanced-economy government debt ratios stand to rise by up to 20% of GDP.
    • This could take the average ratio towards a record (for peacetime) 140% of GDP.
  3. A risk is that this fiscal support to economic activity is withdrawn too soon.
  4. This happened in the wake of the 2008 crisis, not least in the euro area:
    • A sharp reversal of the fiscal stance from 2011 to 2013 caused euro-area GDP to drop far below trend, and pushed some economies back into recession.
  5. Recovery resumed only when fiscal policy returned to neutral, or again became slightly expansionary.

  6. Looking ahead, the most constructive use of fiscal policy will be to shift from ‘filling a hole in demand’ towards ‘building a launch pad for sustainable expansion’:
    • While not neglecting social safety nets and burgeoning inequalities, this means a shift from direct support to wages and jobs, towards public investment and measures that facilitate structural change, not least Active Labour Market Policies.
  7. The Next Generation EU recovery plan 2021 – 2027 is directed some way towards this end.
    • Other countries’ fiscal policy strategies are, so far, less developed or suitably targeted.

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