Posted by: Dirk | July 27, 2015

Schäuble supports European Treasury, which might fight recessions

The German weekly Die Zeit reports that Schäuble support the idea of a Treasury at the European level. It seems that some taxes are thought to be part of the idea, but a member of the Christian Democrats in Brussels and Member of the European Parliament, Elmar Brok, is quoted to have said that the Euro Treasury can smooth the business cycle.

After the lost years of 2010-2014 this would be a first step in the right direction. The euro zone needs more demand, and not less. Why this change? Perhaps it’s the numbers:

Change in the number of unemployed persons (compared to previous month, in thousands), seasonally adjusted, January 2006 – May 2015

source: Eurostat

The net change is now close to zero, and the unemployment rate in the euro zone in May was 11.1%. It is time for expansionary measures, and, with repeated devaluations of the euro being ruled out because of likely retaliation, since the private sector cannot be forced to spend, the public sector should take up the slack.

The proposal of a Euro Treasury is a first ray of light that the euro zone’s policy makers have learned the lessons from 2010-14. However, it critically depends on the capability to deficit-spend, meaning that a Treasury that can use only taxes would be useless to fulfill its job of fighting recessions in the euro zone.

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