Dubravko Radošević ; Institute

of Economics, Zagreb, Croatia Fulltext: pdf (265 KB), Croatian, Pages 180 – 192

Abstracts Many politicians and macroeconomists claim that fiscal deflation would be good for financial stability and growth. We think that deflationary policy tends to lower output and employment, but political aspects of deflationary policies are even more important. Deflationary policies sharpened a long-standing crisis of statehood and political legitimacy. Full employment policy may be desirable for the political stability and social cohesion. It is increasingly clear that many European countries (Croatia included) – and the EU as a whole – need to renegotiate their basic social contracts. But political elites are preoccupied with short-term fixes, they continue with deflationary policies, which have very strong negative redistributional consequences (rising inequality), and have not considered the long-term need for such revisions – to their own detriment and substantial loss of democratic legitimacy. Building the nationwide support for a new social contract – not just support by major parties and tehnocracy, but a grand coalition actually empowered by elections, i.e. constitutional arrangements with citizens-representatives that would monitor political elites to preclude corruption – will require an appeal to fairness. Fairness, not just fiscal rectitude – is essential.

Keywords Deflationary Policy; Full Employment Policy; Reflation; Democratic Legitimacy; Social and Political Stress Tests