Nothing learned from the crisis? Some remarks on the stability programmes 2011–2014 of the Euro area governments

In this chapter, we argue that the projections for achieving stability in the current Stability Programmes (SPs) of Euro zone member countries are very likely too optimistic.2 We aver that by ignoring the importance of external rebalancing and assuming an overly buoyant world economy, the SPs either forecast unrealistic growth rates or unrealistically successful fiscal consolidation. Towards this, we examine the interrelated- ness of public deficit reduction and external imbalances reduction. We derive our argument mainly from evaluating the SPs against the logic of simple accounting identities, which clarify the connections of financial balances and thereby of the two challenges. Thus we transcend the SPs’ narrow focus only on the government balance, and shed light instead on the SPs’ projections of the financial balances of all three sectors in the economy (foreign, private and public) and how they are intertwined with the overall macroeconomic development. Merely the final brief sketch of feasible alternative policy recommendations to address both challenges (sustainability of public deficits and current account positions) requires a greater sophistication of the economic argument and thus involves more judgment.