Is There an Alternative Strategy for Reducing Public Debt by 2032?

Abstract

EMU countries have engaged in fiscal consolidation since 2011. This strategy has proven to be costly in terms of GDP. This cost has been amplified by the fact that fiscal multipliers are high in time of crisis, as recently stressed by the literature. Within this context, we wonder whether there is an alternative strategy aiming at bringing back the debt ratio to 60% of GDP in 2032, meanwhile lowering output losses. To this end, we report simulations realized from a simple model describing the Eurozone and the timing for consolidation. Based on a pragmatic view of the fiscal compact, we find an alternative path for consolidation which achieves a 60% threshold for public debt over the next 20 years in most euro area countries.

Key words: Public debt, Growth, European macroeconomic policy.
JEL: E61, E62, E47.