Open AccessFiscal policy and rebalancing in the euro area: A critique of the German debt brake from a post-Keynesian perspective
Author(s) -
Eckhard Hein,
Achim Truger
Publication year - 2014
Publication title -
panoeconomicus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.289
H-Index - 14
eISSN - 2217-2386
pISSN - 1452-595X
DOI - 10.2298/pan1401021h
Subject(s) - economics , debt , new keynesian economics , monetary economics , macroeconomics , fiscal policy , investment (military) , internal debt , point (geometry) , international economics , keynesian economics , perspective (graphical) , currency , monetary policy , geometry , mathematics , artificial intelligence , politics , computer science , political science , law
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