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Axel Weber: Fiscal Policy After the Financial Crisis

The German Marshall Fund

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01.: Axel Weber: Fiscal Policy After the Financial Crisis

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Partner:: German Marshall Fund
Location:: Brussels Forum
Brussels
Event Date:: 03.22.09
Speakers:: Axel Weber

Summary: The global financial crisis has resulted in capitals around the world adopting sizeable fiscal stimulus packages to cushion its impact. On the European side, in December 2008, the governments of the EU called for a sizeable fiscal stimulus package of 200 billion euros in response to the crisis, and it is estimated that EU package will amount to roughly 1 percent of Europe’s GDP in 2009.

On the other side of the Atlantic, in February 2009, U.S. President Barack Obama signed a stimulus package that amounted to nearly $800 billion over two years, or roughly 2 percent of the United States’ GDP in 2009. And, in light of China’s heavy exposure to falling trade and investment volumes, the Chinese government is also expected to implement an even bigger fiscal stimulus package amounting to roughly 7 percent of its GDP for 2009. These packages clearly serve to cushion the impact of the present crisis.

However, there are rising fears regarding fiscal sustainability. The reason is that the fiscal situation in many countries is already stretched due to the automatic stabilizers -- falling tax revenues and rising expenditures stemming from lower corporate profits and rising unemployment. On top of this are the costs of the financial sector bailout packages that may, judging from past experience, exceed 10 percent of GDP in a number of countries.

A number of emerging economies have already been forced to ask the International Monetary Fund (IMF) for support, and financial markets no longer regard the possibility of a number of core industrialized countries facing a fiscal crisis as an altogether remote prospect.

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