Revue de l'OFCE Hors-série 2013
Failed Austerity in Europe - The Way Out

The independent Annual Growth Survey (iAGS) provides, as a counterpoint to the Annual Growth Survey of the European Commission, an independent assessment of the economic situation of the European Union by three European economic institutes : OFCE (Paris), IMK (Düsseldorf) and ECLM (Copenhagen). The first report, iAGS 2013, argues that Eurozone countries have undertaken illdesigned and precipitous consolidations in a context where most countries are still fragilised by the financial crisis.
Thus, Eurozone is back into recession, unemployment has risen to new record levels and the reduction in debt-to-GDP ratios has fallen disappointingly short of the initial targets. Taking stock of this failure, iAGS 2013 spells out an alternative strategy based on the mounting evidence that fiscal multipliers are much higher now, in the aftermath of the financial crisis and with monetary policy constrained by the zero interest rate lower bound, than they will be once activity starts to recover.
This sensitivity of fiscal multipliers to the state of the business cycle determines the optimal timing of the fiscal consolidation required to reach the 60% debt to GDP target in 2032. Contrary to current policy, optimal austerity must not be frontloaded and it can be credibly delayed by taking advantage of the current European institutional framework. Doing so will enhance growth and lead to the same debt to GDP target with substantially lower unemployment.