The European debt crisis and fiscal reactions in Europe 2000–2014

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: After the outbreak of the global financial crisis, some governments in the EU experienced serious fiscal problems, while others were less affected. This paper seeks to shed light on the divergent fiscal performance in the EU countries before and after the outbreak of the crisis. Fiscal reaction functions of the primary balance are estimated for different groups of EU countries using quarterly data for the pre-crisis period 2001-2008 and for the crisis period 2009-2014. The pre-crisis estimations reveal some differences in persistence and cyclical reaction between different groups of countries, but generally little feedback from the debt stock to the primary balance. The fiscal reaction functions of the countries that eventually developed fiscal problems do not stand out. The estimations on data from the crisis period show largely unchanged persistence and counter-cyclicality but much more feedback from the debt stock, and this applies both to the crisis countries and those less affected. In spite of large deficits and accumulation of debt, the underlying fiscal reaction has become more prudent after the outbreak of the European debt crisis. Terms of use: Documents inJEL codes: E61, E62, H62, H63

Windfall of Low Interest Payments and Fiscal Sustainability in the Euro Area: Analysis through Panel Fiscal Reaction Functions

“…However, many previous studies fail to establish evidence that would be at least partially similar to our findings (see, e.g., Baldi and Staehr 2015;Daniel and Shiamptanis 2013;Greiner et al 2007;Legrenzi and Milas 2013). We believe that this difference stems from the fact that, unlike us, they do focus on Euro area establishment rather than on the windfall gained by the peripheral countries from sovereign bond yield convergence.…”

“…The latter group included Greece, Portugal and France (but not Italy or Spain). Baldi and Staehr (2015) do not find different fiscal reaction functions for the pre-crisis period in the countries that eventually experienced serious sovereign debt problems compared to the ones less affected. In contrast, Baskaran and Hessami (2013) find some evidence that the introduction of the Euro and, in particular, suspension of the Stability and Growth Pact in the late 2003 encouraged borrowing in countries that had traditionally run large fiscal deficits.…”

“…22 See, e.g. Afonso and Balhote (2015), Baldi and Staehr (2015), Baskaran and Hessami (2013), Daniel and Shiamptanis (2013), European Commission (2011), Legrenzi and Milas (2013), Medeiros (2012), Schoder (2014), Theofilakou and Stournaras (2012) or Weichenrieder and Zimmer (2014).…”

“…First, the vast majority of empirical literature on fiscal reaction functions is based on annual data (see, e.g., Ghosh et al 2013;Medeiros 2012;Afonso and Jalles 2011;Mendoza and Ostry 2008;Celasun et al 2007;Bohn 1998). To the best of our knowledge, there are only two papers that use quarterly data (Burger and Marinkov 2012;Baldi and Staehr 2015), while only de Mello (2008) uses monthly data; however, only one of them uses a panel data approach (Baldi and Staehr 2015). Second, Celasun et al (2007) and Medeiros (2012) actually argued that higher frequency (monthly or quarterly) budgetary data often display a very high noise-to-signal ratio and are thus unreliable for the purpose of policy evaluation.…”

“…Nevertheless, there is no evidence that unequivocally confirms one explanation while rejecting the others. It differs in the assessment of fiscal sustainability in the countries that eventually experienced serious sovereign debt problems (cf., e.g., Daniel andShiamptanis 2013 vs. Theofilakou andStournaras 2012), as well as in the comparison of fiscal discipline in those countries to the fiscal discipline in countries less affected (cf., e.g., Baldi andStaehr 2015 vs. Baskaran andHessami 2013). It is not consistent even in the evaluation of the effects of Maastricht criteria on fiscal discipline (cf., e.g., Afonso andBalhote 2015 vs. Schoder 2014).…”