A theoretical view on the euro zone’s fiscal policy choices

F iscal policy in the euro zone as a whole rapidly became less expansionary in the wake of the 2008-2009 crisis, even though the unemployment rate remained very high. Today, fiscal policy is restrictive. What to make of th e s e choice s ? Fiscal policy must ensure fiscal solvency in the long term, which is the case if the public debt ratio stabilises. After the crisis, this has indeed been the case since 2015 in the euro zone; The optimal level of the stabilised public debt ratio, in the long term, must ensure an optimal level of private-sector capital in the economy. In an undercapitalised economy, a lower public debt is needed to steer a larger share of savings into private-sector capital. Since the crisis in the euro zone, the private sector has indeed been undercapitalised, which justifies the decline in the public debt ratio. The major problem, however, is that the euro zone’s more restrictive fiscal policy has led not to an increase in private-sector investment in the euro zone, but to an increase in investment abroad. It was reasonable to switch to a more restrictive fiscal policy in the euro zone to boost private-sector capital, but this policy has failed since it has boosted the accumulation of external assets.