Panoeconomicus 2014 Volume 61, Issue 1, Pages: 21-38
https://doi.org/10.2298/PAN1401021H
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Fiscal policy and rebalancing in the euro area: A critique of the German debt brake from a post-Keynesian perspective
Hein Eckhard (Berlin School of Economics and Law and Institute for International Political Economy (IPE), Germany)
Truger Achim (Berlin School of Economics and Law and Institute for International Political Economy (IPE), Germany)
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
requirements 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: fiscal policy, rebalancing, functional income distribution, debt brake, Germany, Euro area