More Gain than Pain: Consolidating the Public Finances

Philipp Rother, Ludger Schuknecht and Jürgen Stark


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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 andso 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.