A GDP growth of 100 is achievable
The key question is: Can higher public investment sustainably increase economic growth? Because only then would they make sense. It is of course difficult to answer this in advance. Such programs have had mixed successes in the past.
The best-known negative example is probably Japan, where attempts have been made for the last 20 years through repeated economic stimulus programs to sustainably increase the pace of growth. It was unsuccessful, and the only lasting result of these efforts is a national debt, which is now 250 percent of gross domestic product.
The USA has recently provided a positive example of state intervention policy. There, with the help of additional public spending, with strong support from the US Federal Reserve, growth was actually stabilized at a good level.
However, public funds were also used there to strengthen the banking sector. Since then, the US budget deficit has been reduced from 12 percent of GDP to just 4 percent. However, an unbeatable advantage for the USA has been the low energy costs in recent years.
If this instrument were to be used in the euro area, what would the chances of success be? At the beginning there should be an overall positive economic impulse. How sustainable this impulse can be, however, depends heavily on the framework conditions in the individual countries.
Because it depends on whether you initiate private investments with 1 euro in public investments that are higher than 1 euro. Only then would something really be gained even after the stimulation program had expired.
The fiscal policy multiplier would then be greater than 1, and public investments would make sense. If the multiplier is less than 1, however, then government investment programs usually lead to higher national debt without achieving a sustainable revival of GDP growth - the case of Japan threatens.
The instrument box of the ECB
The size of the multiplier is largely determined by the structural constitution of a country. The decisive factors are the flexibility of the labor market, education and training, the efficiency of the bureaucracy and the quality of the infrastructure.
These dependencies are well known. They have long been on the countries' reform agenda, and the central banks are also calling for them to be implemented. So here too, the countries that have done their reform homework will benefit more from public spending programs than those that have delayed necessary reforms.
Fiscal programs make more sense in countries in which the structural environment corresponds to the requirements of the globalized world. If these conditions are not met, it is very likely that the fiscal impulse will fizzle out. And Germany? We have already been better equipped for tough times.
Fiscal impulse and structural reforms
The discussion about greater use of fiscal policy is entirely justified and makes sense. Perhaps it should be used with a different tongue than before. It is not about spending public money for the sake of spending and distributing it according to the watering can principle.
Rather, the funds should be used in such a way that they work with the greatest efficiency and in the long term. And that would be the case if the fiscal impulse also triggers structural reforms. In other words: Europe-wide fiscal programs should be used specifically to cushion or offset the initially inevitable negative economic effects of structural reforms.
Then they could take some of the fear of these reforms from the governments. And the link between effort (short-term negative economic effects) and reward (funds from the European fiscal program) could also be made clear to the public.
If the reforms are not addressed soon, there is little hope of a higher growth path in the longer term. Because we only have the time that an expansive economic policy can buy once.
If the countries remain inactive, sooner or later not only the monetary but also the fiscal ammunition will be exhausted. And then reforms become even more painful.
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