Confidence — the fairy that turned out to be a witch

16 April, 2015 at 10:28 | Posted in Economics | Leave a comment

65a767700602f1869d169a6150792046Remember the old times? Here is a quote from ECB President Jean-Claude Trichet … on September 3rd, 2010:

“We encourage all countries to be absolutely determined to go back to a sustainable mode for their fiscal policies,” Trichet said, speaking after the ECB rate decision on Thursday. “Our message is the same for all, and we trust that it is absolutely decisive not only for each country individually, but for prosperity of all.”

“Not because it is an elementary recommendation to care for your sons and daughter and not overburden them, but because it is good for confidence, consumption and investment today”.

Well, think again. Here is the abstract of ECB Working Paper no 1770, March 2015:

“We explore how fiscal consolidations affect private sector confidence, a possible channel for the fiscal transmission that has received particular attention recently as a result of governments embarking on austerity trajectories in the aftermath of the crisis … The effects are stronger for revenue-based measures and when institutional arrangements, such as fiscal rules, are weak … Consumer confidence falls around announcements of consolidation measures, an effect driven by revenue-based measures. Moreover, the effects are most relevant for European countries with weak institutional arrangements, as measured by the tightness of fiscal rules or budgetary transparency.”

The confidence fairy seems to have turned into a confidence witch. One more victim of the crisis. But this one will not be missed.

Francesco Saraceno

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