Are European fiscal rules that bad? Discretionary fiscal policies in New Member States

Abstract

There is no clear-cut evidence on how the adoption of the European fiscal standards influences discretionary fiscal policies within the Member States. This study investigates that phenomenon on the example of the 2004 enlargement. The results show that the effects of the adoption of EU fiscal rules bring a statistically significant change towards more countercyclical behavior. The results are robust for different model specifications, including alternative time spans and correcting for the possible influence of the financial crises and political forces. Interestingly, the year 2004 did not have any significant impact on the change in fiscal policies in the Old Member States, suggesting that the EU entry might motivate new members to run more prudent budgetary policies.

Fiscal policy in former Yugoslavian countries (2001–2014): stylised facts and budget elasticities

“…Koczan (2016) suggests that the political cycle might be linked to a larger discretionary component of fiscal policy (in this case concerning expenditures) in the Western Balkans. While our results can also be influenced by the fact that the analysed period includes the so-called 'Great Recession', they suggest the strong role of spending policies in former Yugoslavian countries as a countercyclical tool; this is in line with results by Fincke and Wolski (2016) for new E.U. member states.…”

“…growth, general government debt and real interest rate on the right side. Using similar samples, Staehr (2008) with EU27 andFincke andWolski (2016) with 10 new E.U. member countries obtained similar elasticities of 0.496 and 0.337, respectively.…”

This Time is Different: Fiscal Response to the Covid-19 Pandemic among EU Countries

“…These two variables serve as the main identification mechanism on the relationship between the central fiscal policy and the business cycle Fincke & Wolski (2016). A positive coefficient signals counter-cyclical behavior (as fiscal policy would consolidate as the output increases), whereas a negative one reveals procyclical reactions (as fiscal policy would accelerate as output increases).…”

“…2 The year 1992 marks the signature of the Maastricht Treaty, later followed by the Stability and Growth Pact (SGP) proposed in 1997, setting up a framework for sound and sustainable public finances in the EU. For more information about history of EU fiscal rules see Wyplosz (2006) or Fincke & Wolski (2016).…”

“…to vary, however, for the countries which joined the EU in the 21st century. For instance, based on the EU enlargement in 2004, Fincke & Wolski (2016) find evidence that the adoption of EU fiscal rules might change public finance policy towards more counter-cyclicality. We take these observations as a starting point for this study, and assess how the recent pandemic situation might have challenged the conventional view that fiscal policy functions differ between OMS and NMS.…”