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Economic policy in EMU: What role for fiscal and monetary policy? Which has more scope left? How to combine them?

Author(s): Marco Buti

Date published: Jan 2020

SUERF Policy Note, Issue No 124
by Marco Buti, European Commission


JEL-codes: E24, E61, E62, E63.
Keywords: Fiscal policy.

This paper identifies the economic policy options to respond to a possible economic downturn and strengthen the euro area in the medium- and long-term. The European and world economies have weakened over the past year and GDP growth is unlikely to rebound swiftly. The subdued outlook for growth and inflation prompted the European Central Bank to implement another round of easing measures in September and to call for fiscal and structural policies to be stepped up to create a more supportive and efficient policy mix. In parallel, long-standing structural impediments to productivity growth have yet to be resolved, improving human and physical capital through increased investment in education and key infrastructure. In the absence of a euro area budget for stabilisation, a supportive fiscal stance for the euro area as a whole requires a more coordinated response. Very low or negative financing costs provide an opportunity to refresh and modernise the public capital stock, thereby boosting potential growth, bring forward projects with a high social, environmental and economic return, and help the transition to an environmentally and socially sustainable economy. The low interest environment is also increasing the efficiency of fiscal policies, while complementing the functioning of monetary policy, which is already highly overburdened.

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SUERF Policy Note, Issue No 124SUERF Policy Note, Issue No 124

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