Real Instituto Elcano
Retornar a la austeridad en Europa: ¿entendible o entelequia?

European response to the Ukrainian crisis: fiscal integration and strategic autonomy

Federico Steinberg and Jorge Tamames, from the Elcano Royal Institute, analyze the European response, in terms of economic and fiscal policy, to overcome the crisis caused by the war in Ukraine and inflation increase. In their opinion, Germany's position will be key, particularly if it promotes a new model of economic governance with greater strategic autonomy from the EU that allows the euro zone to change towards an economy -more similar to that of the US- that relies more on domestic demand and takes advantage of the political advantages of issuing a reserve currency with greater fiscal leeway.

Main messages of the article:

  • There is no single recipe for economic prosperity: for example, Germany with its model of austerity and current account surpluses and the United States with its model relying more on domestic consumption and less on austerity.

  • Economic austerity to get out of the financial crisis: Europe opted for this recipe through internal wage devaluations and austerity policies that led to an export boom and a structural current account surplus for the euro area as a whole, but also contributed to significant social unrest, increases in inequality and the rise of anti-establishment parties.

  • Fiscal expansion during the pandemic: The economic crisis triggered by the Covid 19 pandemic generated an unprecedented expansionary policy reaction in Europe and in most countries, which in the case of the EU was combined with a coordinated and cooperative response from which the Next Generation funds were born.

  • Response to the Ukraine crisis: Although the inertia of the expansionary policy continues in Europe (fiscal rules suspended until 2023), the new economic environment with strong inflationary pressures, together with high levels of debt and public deficits, and worse prospects for economic growth, create a worrying picture for the future. This is compounded by the EU's need to develop strategic autonomy in a number of areas.

  • The greater the fiscal integration in the EU, the greater the room for maneuver: the EU, and the Eurozone in particular, should consider changes in its growth model, where domestic demand would play a more important role, economic governance and mentality towards a globalized economy. This will require progress in fiscal and banking union, which would provide ample room to implement policies to stabilize the economic cycle and support the vulnerable sectors most affected by the rise in energy and food prices.

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