Fiscal discipline – So far, Europe has tried to solve the problem largely through “austerity” - forcing massive cuts in government
spending in Greece and elsewhere. This is problematic because it typically deepens economic weakness, so that revenues fall, and the deficits actually get worse. Over a longer period of time, it’s possible to reduce the debt/GDP ratio through gradual changes in fiscal policy, particularly if interest rates are lower than the growth rate of the economy (which helps you to grow your way out of the debt), but focusing so much on austerity hasn’t been helpful. Germany has been focused on creating a “fiscal union” to provide stronger external control of budgets, but that sort of agreement would take time, because it would have to be approved by all of the EU member governments.
spending in Greece and elsewhere. This is problematic because it typically deepens economic weakness, so that revenues fall, and the deficits actually get worse. Over a longer period of time, it’s possible to reduce the debt/GDP ratio through gradual changes in fiscal policy, particularly if interest rates are lower than the growth rate of the economy (which helps you to grow your way out of the debt), but focusing so much on austerity hasn’t been helpful. Germany has been focused on creating a “fiscal union” to provide stronger external control of budgets, but that sort of agreement would take time, because it would have to be approved by all of the EU member governments.
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