The European Policy Framework: A Lack of Coordination Between Monetary Policy and Fiscal Policy

This paper analyses why the coordination of macroeconomic policies is essential to deal with the Euro crisis. The building blocks of the European macroeconomic policy—the Junker Investment Programme and the ECB Quantitative Easing programme—are not considered a sufficient answer to this problem. The paper suggests that a fiscal stimulus can and must be designed so as to target both aggregate demand and potential output. Total investment is considered the key-variable in this approach and both private and public investment should be furthered, to the extent that the public capital stock is a driver of growth, directly entering in the firms’ production function or shifting total factor productivity. To this aim, a sizeable programme of public investment could be implemented without affecting public debts through a conditional and temporary overt monetary financing. The paper also argues that revenue neutral tax shifting may help in making sustainable this strategy, enhancing potential output without raising the government deficit.