after the 2009 meltdown: the EC estimate of the output gap was ‐4% in 2011, Borio et al have an estimate of ‐2% and the OECD ‐3%. Just as potential output tended to be overestimated before the crisis, it still runs the risk of being overestimated now.

Had potential GDP and structural fiscal balances been more accurately measured, policy makers may have looked at economic developments differently. For example, while Kanda (2010) estimates a deterioration of 3.8 pp in structural revenues to GDP during 2006‐08, he finds an 8 pp increase in structural expenditures to GDP in the same period. Had the numbers been presented as such, different choices would have been made. Another paper (Liu et al , 2015), studying OECD countries, finds the average fiscal impact of housing and equity prices before the crisis to have been around 2.25% of GDP. For Ireland, the housing effect was 3% of GDP and in Spain the equity market effect was 4% of GDP. Perhaps additional revenues during asset price induced booms should be thought of in the same way as are revenues from commodity price booms ‐and saved.

Fiscal revenues can be notoriously volatile rising faster than GDP growth in good times and falling faster in bad times. Sometimes they take a long time to recover while expenditures tend to be much more “sticky”. Thus, despite efforts at fiscal consolidation since 2010, years of increasing fiscal expenditures before, during and just after the financial crisis when tax revenues and output fell have played havoc with the debt ratios of GIPS. Ireland’s real expenditures grew 60% in the 7 years leading up to 2008 (in contrast, they only fell 12% in the 7 years 2008‐2014), Spain’s grew 35%, Greece’s 38% and only 11% in Portugal. In relation to GDP, Ireland’s government grew an amazing 11pp.<sup>82</sup> The second largest increase was Greece at 4.5pp. In the adjustment period since 2009, what is striking is that Greece has had a commensurately large expenditure decline (35%) even as tax revenues fell the most. Portugal has had no decline in real terms.<sup>83</sup> With growth being slow to recover, every country’s debt ratio is now around 100 or above, but the _increases_ in the debt ratios in seven years are particularly striking, being 76, 84, 72 and 64 pp respectively. The increases are spectacular in view of the dynamics of the preceding years when, even with high growth boosting tax revenues (in Greece and Ireland) and low interest rates, debt ratios fell a small amount (only Spain had a 22 pp decline); Portugal had a small increase.

# **Conclusions**

Seven years after the 2008 financial crisis, economic recovery is fragile. Adjustments in fiscal, monetary, structural and financial sector policies continue to be needed. Fiscal positions are weak, with substantially elevated debt ratios and the policy composition has changed, with social transfers and interest expenditures gaining at the expense of investment. Tax burdens, especially on labor, remain high and could be more supportive of labor market performance and investment. Monetary policy has become supportive of output growth over time, and its support is still needed. The modalities of financial restructuring and the status of bank resolution in the Eurozone continue to be a source of uncertainty. Financial intermediation has not recovered and substantial fragilities remain. The plight of smaller firms and banks is still poor in many countries. Current account adjustments still tend to reflect weak domestic demand more than vigorous export economies, particularly where there is high unemployment. Investment recovery is lagging, households and nonfinancial corporations continue to deleverage, most labor productivity gains have been at the cost of employment, and the employment rate is low. Adding to the troubles of Europe is the prospect of slower global growth, risks from the results of the Brexit vote, and more uncertainty in financial markets. There are ways in which GIPS and Europe, acting swiftly, can best protect growth and employment. This paper, reaching into new research and studies, has highlighted some “lessons”, old and new, in economic policy making that should shed some light on policy choices.

> 82 At the same time, the number of public servants increased 35%, and wages rose 60% during 2000‐08.

> 83 Ireland and Spain had 12 and 14 percent declines.

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