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Symposium 2015

Virtual Library File - The ”austerity myth”: Gain without pain?

The Challenge

In the aftermath of the global financial crisis and the Great Recession, many countries are facing substantial deficits and growing debt. As analyzed in the 16th Geneva Report on the World Economy, th ...

In the aftermath of the global financial crisis and the Great Recession, many countries are facing substantial deficits and growing debt. As analyzed in the 16th Geneva Report on the World Economy, the global debt-GDP ratio continues to grow, while growth and inflation remain low, raising concerns about the dangers posed by new crises. This situation spurs the need to consolidate public finances in order to bring down debt-GDP ratios. When setting up specific fiscal consolidation plans in order to achieve this, policymakers can generally choose from a wide range of possible fiscal instruments. The aim of this session is to discuss how consolidation plans should be designed to bring debt-GDP ratios down, while minimizing short-run social and economic costs.


In this paper the author accesses the effects of fiscal consolidation by presenting four detailed country case studies (Denmark, Ireland, Finland and Sweden). In all four countries consolidation was associated with expansions. The author argues that at least two important factors which contribute to this development:

  1. The exchange rate regime, and
  2. Changes in price competitiveness.

In addition he discusses the main drivers of the expansion, decomposed by changes to domestic demand vs. export-driven growth.