Report
Patrick Artus

Under what conditions can a more expansionary fiscal policy in the euro zone reduce the public debt ratio?

Is it possible that a more expansionary fiscal policy in the euro zone could now reduce the public debt ratio? First, it would have to not drive up the real long-term interest rate, which is possible given the expansionary monetary policy and the excess savings over investment in the euro zone. A permanently higher fiscal deficit of 1 percentage point of GDP would then have to increase potential growth by more than 1 pp per year (this is obviously potential growth; in the year when the fiscal deficit is increased, demand is increased and GDP growth is increased, but then the permanently higher fiscal deficit no longer has any effect on demand growth). This effect seems very unlikely, and far higher than our estimate of it (0.3 pp per year). A more expansionary fiscal policy in the euro zone would therefore increase the public debt ratio further.
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Patrick Artus

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