Consolidation seems to be the need of the present. Although this statement ought to refer to the debt situation of public finance, all too often it is the deficit ratio as an instrument variable which is taken as the target of consolidation ('zero-defict'). Recent studies try to show 'non-keynesian' results of the reduction of structural deficits, i.e. positive short-term effects if the magnitude of fiscal retrenchment is only big enough and achieved by cutting public expenditures rather than increasing taxes. In this paper empirical evidence from the European Union is put forward to counter such claims: reducing structural deficits has always ha negative ('keynesian')effects in the short term and may even harm growth in the long term, if consolidation is focussed on cutting investment expenditures.
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Paper provided by EconWPA in its series Public Economics with number
0404010.