As in Peter Pan’s fictional island of Neverland, people in Euroland refuse to grow up and face reality. The “never-never” refers to the idea of a countercyclical fiscal stimulus, which still faces massive opposition in European capitals. To put things straight, in normal times fiscal policy should focus on enhancing potential growth rather than trying to micromanage the economic cycle. However, today’s times are anything but normal. Interest rates up to long-term maturities are in negative territory, and the ECB has restarted quantitative easing.

Click here to continue reading the document