The European Debt Crisis: Implications for Fiscal Policy Design in the Euro Zone

Svend E. Hougaard Jensen will present his recent article: Is There a Need for a New Fiscal Framework in the Euro Area?

Thursday, May 5, 2011 - 15:00 to 16:00

The rules stipulated by the Stability and Growth Pact have proved impossible to enforce. However, there is still a need for a fiscal framework within the Euro Area. This paper suggests an inter-temporal assignment, where fiscal policy focuses on long-term objectives and monetary policies focus on short run objectives. Specifically, the paper argues for public debt targets as a practical way to achieve such a set up without compromising the independence of monetary policy. An excessive debt protocol is proposed to give enforceable form to this targeting arrangement, and also provide a mechanism to identify the stable region within which the targeted debt must operate. Making these factors explicit would both improve the credibility of the Euro Area’s fiscal policies and reduce the risk premia on borrowing costs. However stabilising the stock of debt by fiscal controls alone is not always possible. The paper therefore examines the “competitiveness pact” (internal devaluations) as a means of circumventing those barriers. This framework provides analytic support to underpin many of the innovations under discussion in Brussels.

Svend E. Hougaard Jensen is a professor of economics at the Copenhagen Business School and a Fellow of WDA (World Demographic Association). He graduated with a MSc (Econ) degree from the University of Aarhus and an MA (Econ) degree from the University of Manchester (UK), before earning his PhD (Econ) from the University of London (UK) in 1990. On leave from academia, Hougaard Jensen has served as head of the Division of Economic Analysis within the Ministry of Trade and Industry (MTI) in Denmark. His research has mainly been within the areas of macroeconomics, population economics and international economics, focusing on topics such as pensions, debt sustainability, stabilisation policy in monetary unions, structural reforms in the European Union, and productivity measurement.

Please find the newest version of the paper attached.

Registration: Sign up until 3rd May, 2011 at coe.dbp@cbs.dk.

The page was last edited by: Communications // 04/28/2011