Austerity of fiscal stimulus in times of crisis – an old debate without consensus

Abstract

The latest global economic and financial crisis has once again drawn the attention of economists to the debate whether it should be saved or spent in times of crisis. A number of more or less different concepts and schools have been developed in response to the role of the government and the character of the economic policy that needs to be implemented in times of crisis. Regardless of the differences between these concepts, they can all be grouped into two global approaches: interventionism and stimulating on the one hand and liberalism and saving on the other. The first approach, known as the Keynesian concept, advocates the idea of a necessity of fiscal intervention and increased consumption in times of crisis, while the second approach, known as neoliberalism or a monetary concept, is against fiscal intervention and argues that the government should create a stable environment, to refrain from excessive consumption and to stimulate austerity. These two global approaches represent two different perceptions of reality, given that they recommend the use of completely different economic policy instruments to achieve the same goals. Examples of economic crises through history and the stance and reaction of economic policy in such conditions unambiguously show that there is no universal macroeconomic concept that is applicable in all countries and at all times. On the contrary, economic history shows that classical school prevailed at certain times by favoring the concept of "liberal market" over fiscal intervention, while in others the concept of fiscal intervention and increased government consumption prevailed. That is, the past confirms that the liberalism and the concept of fiscal intervention changed after certain periods of time. Usually, the selected and applied concept initially yielded good results, but then it begins to generate serious problems and contradictions, which makes it untenable and requires a change in the direction of economic policy. The issue of choosing economic policy is particularly relevant for certain EU Member States, which, despite the consequences of the latest economic and financial crisis, face a debt crisis. One of the main dilemmas for these countries is whether to pursue an austerity policy that stabilizes public finances but deteriorate the economic growth or a policy of encouraging economic growth through increased consumption, but which additionally increases indebtedness and questions its sustainability and effect on economic growth in the future. The debate is further complicated taking into account Eurozone member states, where national fiscal policy plays a much larger role, given that member states cannot conduct their own monetary policy. The paper examines these two conflicting concepts, citing arguments for and against their application, and explores their practical application during the latest global economic and financial crisis.