Constricted, lame and pro-cyclical? Fiscal policy in the euro area revisited

Abstract

It is often argued that fiscal stabilisation in the euro area compares unfavourably with the US, not least because of the perceived limitations of the Stability and Growth Pact. This paper qualifies this perception by taking a closer look at fiscal policy making since the mid-1990s. It examines a number of elements which are generally overlooked or not considered in the analysis of fiscal stabilisation. In particular, on top of discretionary fiscal policy, which generally is at the core of existing studies, it also takes into account the size of automatic stabilisers. Moreover, it considers the difference between policy intentions, as formulated or perceived in real time, and actual outturns, and possible reasons for the gap between the two. On the basis of such a more specific analysis, fiscal stabilisation in the euro area appears less dire than commonly assumed. It also suggests a number of points on how to improve the track record, including by strengthening fiscal governance.

Fiscal Politics in the Euro Area

“…The issue is widely discussed in the literature and the results are mixed depending on the sample period, the data source, and the empirical specification adopted. Some studies find that fiscal policy in EA was acyclical until the beginning of the global financial crisis (Buti and Van den Noord 2004;Fatas and Mihov 2009), but most studies report evidence of procyclicality, especially in good times and following the introduction of the SGP in 1999 (European Commission 2004;Cimadomo 2005;Candelon, Muysken, and Vermeulen 2007;Deroose, Larch, and Schaechter 2008). The results also depend on whether the analysis is conducted ex post or in real time.…”

Discretionary Measures and Automatic Stabilizers in the Croatian Fiscal Policy

“…Deroose, Larch and Schaechter (2008) argue that «it is predominantly the differences in size of governments that impact how strong automatic stabilizers are» and stress that the government size reveals sufficient information on the magnitude of automatic stabilizers in different countries. In addition, van den Noord (2000) firstly, and Girouard and Andre (2005) afterwards, suggest that the most important factor in determining the cyclical sensitivity of the fiscal position is the size of the general government sector.…”

Política económica europea vista desde el Estado español

“…Las economías menos fuertes tienen que identificar su propia senda de crecimiento económico. La presión francesa para modificar el etiquetado del Pacto -añadiendo «Crecimiento» a «Estabilidad»-fue simple cosmética y dejó intacta la filosofía esencial del Pacto (Deroose et al, 2008).…”