German economists back British Chancellor

by Paul Goodman

George Osborne said in his budget speech that the Government's spending plans "have been strongly endorsed by the IMF, by the European Commission, by the OECD, and by every reputable business body in Britain".

He can now add three senior ECB economists to that tally.

Politeia has published an assessment called More Gain Than Pain: Consolidating the Public Finances.  In it, Philipp Rother, the head of the bank's fiscal surveillance section, Ludger Schuknecht, senior adviser in the economics directorate general, and Jürgen Stark, a member of the executive board and governing council, line up behind the Chancellor.

Politeia says -

"Across the world economies face unprecedented levels of public debt.  Moves must be made to balance the books. Most economists agree that fiscal consolidation will, in the long term, be beneficial. It will bring economic growth, helping to restore the fiscal position. But fears remain for the short term on Keynesian grounds: consolidation could prompt an adverse impact on demand and so damage economic recovery.
 
The distinguished authors from the ECB, Philipp Rother, Ludger Schuknecht and Jürgen Stark, explain however, that the short-term benefits of consolidation will also be significant. It will build confidence in the sustainability of public liabilities and so support demand. It will also guard against vicious circles of financial and fiscal instability. These remain an ever present danger, given the close interlinking of the financial and fiscal sectors today.  Indeed, so deleterious are the effects of high public debt on confidence, growth and stability that cutting deficits and debt now is clearly the best course."