Budget Consolidation: wishful thinking and harsh reality

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Budget Consolidation: wishful thinking and harsh reality

In 2002, both German and Portugal faced an

Excessive Deficit Procedure, when their deficits crossed the 3% hurdle, one of the criteria for adherence to the 12-member Eurozone. France looks as if it too might be headed in this direction, after French press sources revealed that the 3.04% budget figure submitted to the Commission for 2002 was rounded down. Most Member States have recently had some difficulty abiding by the guidelines established in the Stability and Growth Pact, and some analysts are recommending the pact be relaxed, in light of possible military action against Iraq.

Stefan Schneider and Stefan Bergheim, of Deutsche Bank Research, analyse the possible scenarios out of the current crisis using the German example. They implicitly argue against relaxing the Stability and Growth Pact and outline three scenarios for a way out of the situation. Their analyses finds that the German government is counting on overly optimistic growth assumptions to reach a balanced budget by 2006. They investigate whether a tight fiscal savings policy, an unanticipated economic growth spurt or the the “ride on the Laffer curve,”– a short-term expansionary fiscal policy strategy that could lead to consolidation in the medium term, due to a positive cyclical effect — could yield a success story in bringing the economy back into line.

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full study. For more DB Research Analysis seeDeutsche Bank Research website.  

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