Fiscal austerity and monetary policy in times of crisis

In the last few years, budget deficits have risen in almost all countries, and that is the consequence of the recession and, in some cases, to bank support measures. Some governments should start reining in deficits now, even though most countries have not fully recovered yet, if done properly, by reducing spending rather than by increasing taxes, budget consolidations are not harmful, and might indeed result in a boost of GDP. Taking all into account, fiscal consolidation is often smaller then estimated in the past. In most weaker EU countries since government debts are still high and exceeded threshold value of 60 percent of GDP, the big challenge in the future will be sustainable fiscal consolidation which supports long term growth and employment and promotes welfare state. Despite the ongoing debate on the effects of fiscal deficits on economic performance there is a lack of empirical investigation of social context. It means that many studies of fiscal policy focus on growth (especially at the short run) effects while ignoring implications for welfare. Analysis of 10 EU countries shows that under current policies the path of austerity cannot be sustainable for all countries, especially for weaker countries that are already facing decline in economy. Austerity measures in the EU countries have had a negative impact especially on employment and poverty. Many analysis show that enhanced fiscal austerity, implemented in terms of increased interest payments for public debt or in terms of levels of public debt, has a distinct impact on individual parts of the budget categories. In particular, it has been shown that increased fiscal pressure results in a lower budget share of public investments, whereas in the case of pension spending, the budget share even increases. Increased fiscal pressure doe not need to lead to a higher budget share of entitlement spending. The positive direction of the effect suggests that the inertia inherent in pension spending is larger than in other cases, say health or public investment. Taking all into account. Developing economies, and weaker economies should find a different way in order to decrease budget deficit and in order to improve their situation. Fiscal austerity can be helpful for economies, like, for example Germany, that has much stronger economy and that has strong public and private investmen