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The Euro Crisis and Its Aftermath$
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Jean Pisani-Ferry

Print publication date: 2014

Print ISBN-13: 9780199993338

Published to Oxford Scholarship Online: May 2014

DOI: 10.1093/acprof:oso/9780199993338.001.0001

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Redemption Through Austerity?

Redemption Through Austerity?

(p.108) Chapter 14 Redemption Through Austerity?
The Euro Crisis and Its Aftermath

Jean Pisani-Ferry

Oxford University Press

Shortly after Mario Draghi took office as president of the European Central Bank (ECB), he called for what he named a “fiscal compact”, a further step towards improving fiscal discipline in the euro area. In response, the leaders of 25 European Union countries soon announced their intention to adopt a new fiscal treaty. This was not the first time that European policymakers had put the emphasis on fiscal discipline as a remedy to the crisis. In the aftermath of the global crisis, the United States and the euro area actually adopted two opposite strategies. In the United States, priority was given to private deleveraging, with bold support from the central bank. In contrast, the drive to consolidate was stronger in the euro area and monetary policy less supportive. Although there are several explanations to this, fundamentally, many in Europe genuinely believed that the euro crisis was essentially rooted in fiscal imprudence. Although it is hard to dispute that countries in the euro area must reverse the drift in public-debt ratios, to tighten aggressively when the economy is already in recession is a risky strategy. Too-early and too-aggressive tightening can result in dreary economic performances, disappointing budgetary outcomes, and public resistance to austerity – the opposite of the intended result. The backlash came in 2013, when austerity started being widely blamed for the continent’s woes.

Keywords:   European Central Bank, euro crisis, fiscal compact, European Union, fiscal treaty, long-term refinancing operation, banks, Germany, fiscal discipline, Treaty on Stability Coordination and Governance, austerity

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