Was the belief that it was applying Ricardian neutrality the euro zone’s mistake?

The conduct of fiscal policy in the euro zone from 2011 is often criticised, as fiscal deficits were reduced at the same time as the unemployment rate was high and rising and the euro-zone crisis was causing activity to fall. Some economists continue to defend the thesis of Ricardian neutrality: the fiscal deficit can be reduced without reducing activity if public spending is reduced (as the expected future tax burden is then reduced) instead of increasing taxes. In the euro zone, the reduction in the fiscal deficit from 2010 to 2018 was achieved thanks to: An increase in household taxes; A reduction in public investment and in spending on education and R&D. So Ricardian neutrality, which would have seen a reduction in current public spending, was not applied. The understanding of this mechanism will lead significant fiscal deficits to remain in place for a long period after the COVID crisis . 1. See for example A. Alesina, O. Barbiero, C. Favero, F. Giavazzi, M. Paradisi, “The Effects of Fiscal Consolidations: Theory and Evidence”, NBER Working Paper no. 23385, November 2017