Posted by: Dirk | January 25, 2013

Spain uses expansionary fiscal policy – a tiny, tiny bit of it

Spanish government unemployment benefits, which stand at €400 per head of household, are being extended indefinitely as long as Spanish unemployment is above 20% (as reported by El Pais). This is a first step in the right direction. Of course, this will increase the Spanish government budget deficit, but not by the full amount since there is some fiscal multiplier at work. People will spend the money or repay debt (and hopefully not save it). That way, either consumption increases or the financial problems get better.

The Spanish government should stick to this policy even though the troika in theory has the power to uphold it. The euro left the Spanish government without options: no exchange rate devaluation, no monetary or fiscal policy. Adjustment in the euro straitjacket cannot and does not work. So, it is a good sign that president Rajoy and his government now support not only banks, but also the people. Again, it is a tiny, tiny step, in the right direction. Nevertheless, the alternative would have pushed back some of the unemployed into deepest poverty since they would be without any income. This should not be acceptable anywhere in Europe, under no fiscal circumstances.


  1. […] to the Mundell-Fleming model. In Spain, expansionary fiscal policy is used now as president Rajoy has increased the duration of unemployment benefits. This is not the first expansionary fiscal policy that the troika seems to allow: in September […]

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