Comment

Abstract

The financial crisis hit European economies differentially. On impact, the shock was mediated by the varying structural characteristics of Euroland’s financial markets. While rules and regulations are the prerogative of the EU level, thus largely harmonized, financial systems still show a significant variety, bearing distinctive national traits. The secondround impact was about repercussions in the real economy. Here, again, the asymmetric response reflected substantial differences in the sectoral composition of European Monetary Union (EMU) member economies. Vulnerable in particular were those sectors that had, on the back of low interest rates, generated capacities (especially in the construction sector), which were (ex post) seen as economically nonviable. In an older vocabulary this would have been called “overaccumulation,” all of this calling for a deep, structural adjustment process, having essentially to do with the supply side. This is, in a broad-brushway, the scenario onwhich Christopher Erceg and Jesper Lindé want to shed light. Presenting a very well-written and convincingly structured paper, which was definitely a pleasure to read, theymake at the same time a policy proposition that flies flatly in the face of at least prevailing European perceptions. Namely, they suggest that bigger countries with a more sustainable debt position should use their “fiscal space” to give their peripheral brethren a helping hand via a strongly discretionary budgetary impulse. In fact, this was an argument also frequently referred to in the debates (and deliberations) in the Group