Coping with the European Public Debt Problem

The paper examines the main instruments involved in Europe's "new" strategy in 2012. It explains why none are suited to the current challenges in terms of growth recovery and public debt control. The reason is basically that all the instruments focus on factor cost reductions (capital and labor), that is, on the supply side of the economy, while, the evidence clearly suggests that the main issue is on the demand side. Hence, drawing on a few basic equations, the paper discusses the conditions under which a fiscal stimulus might eventually reduce the public deficit and help control the debt by means of induced growth and fiscal revenues. This is not to say that a balanced budget per se is a desirable objective, for it is acknowledged that a public deficit may be desirable in the long run to foster economic growth. The purpose here is to show that, in the context of the European sovereign debt problem, a fiscal stimulus could eventually reduce the deficit and the debt ratio while stimulating economic growth. The formal condition proves to be reachable for the range of the key parameters observed in most member countries of the Organization for Economic Cooperation and Development. The paper also discusses the problems that could make the condition more difficult to deal with in the European context and how they could be solved.