Fiscal Policy and Rebalancing in the Euro Area: A Critique of the German Debt Brake from a Post-Keynesian Perspective

Levy Economics Institute, Working Paper No. 776

24 Pages Posted: 12 Oct 2013

See all articles by Eckhard Hein

Eckhard Hein

Berlin School of Economics and Law - Institute for International Political Economy (IPE) Berlin

Achim Truger

Berlin School of Economics and Law; Berlin School of Economics and Law - Institute for International Political Economy (IPE) Berlin

Date Written: October 10, 2013

Abstract

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 its fiscal compact. In this paper we fundamentally criticize the debt brake. We show that (1) it suffers from serious shortcomings, and its success is far from certain even from a mainstream point of view; (2) from a Post-Keynesian perspective, it completely neglects the requirements for fiscal policies of member-countries in a currency union and will prevent fiscal policy from contributing to the necessary rebalancing in the Euro area; and (3) 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 behavior in 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 its fiscal compact. In this paper we fundamentally criticize the debt brake. We show that (1) it suffers from serious shortcomings, and its success is far from certain even from a mainstream point of view; (2) from a Post-Keynesian perspective, it completely neglects the requirements for fiscal policies of member-countries in a currency union and will prevent fiscal policy from contributing to the necessary rebalancing in the Euro area; and (3) 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 behavior in Germany.

Keywords: Fiscal Policy, Rebalancing, Functional Income Distribution, Debt Brake, Germany, Euro Area

JEL Classification: E25, E61, E62, E64, E65, H62, H63

Suggested Citation

Hein, Eckhard and Truger, Achim, Fiscal Policy and Rebalancing in the Euro Area: A Critique of the German Debt Brake from a Post-Keynesian Perspective (October 10, 2013). Levy Economics Institute, Working Paper No. 776. Available at SSRN: https://ssrn.com/abstract=2338491 or http://dx.doi.org/10.2139/ssrn.2338491

Eckhard Hein (Contact Author)

Berlin School of Economics and Law - Institute for International Political Economy (IPE) Berlin ( email )

Badensche Straße 52
Berlin, 10825
Germany

Achim Truger

Berlin School of Economics and Law ( email )

Badensche Strasse 50-51
Berlin, D-10825
Germany

Berlin School of Economics and Law - Institute for International Political Economy (IPE) Berlin ( email )

Badensche Straße 52
Berlin, 10825
Germany

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