Fiscal Policy in Europe, 1991-2003: An Evidence-based AnalysisThis report examines the stance of fiscal policy in Europe since the 1980s, and the attempts that have been made to restrain the excessive deficits that have built up over the past 15 years. Some attempts to impose discipline have been successful, but many have not. The authors examine the reasons for this, and draw lessons for fiscal policy-making in the future. Current policies could weaken the euro. When the effects of a high deficit in one state are spread across the whole currency union, there is an incentive to run a more expansionary fiscal policy. Unsustainable debt paths can therefore be inflationary. Moreover, the loss of national monetary policies may have caused many governments to rely on fiscal policies to reach their goals. Fiscal discipline has therefore weakened visibly since EMU started, and this has undermined the institutional structure that was set up to enforce that discipline. A new structure will eventually be needed. A key point seems to be that a significant consolidation did take place as countries tried to meet the Maastricht criteria. But having qualified, many member states then relaxed their fiscal policies.The results suggest that, within five years of the launch of the euro, this 'Maastricht Effect' of greater discipline will have been eroded. The authors also find evidence that the smaller countries have shown more discipline than their larger neighbours. In addition, they find that governments have attempted to expand their economies for electoral gain. Finally, they emphasise the crucial role of growth. In fact, the report finds that the reductions in debt that have been achieved so far have been created almost exclusively through economic growth. This appears to be true even under regimes with the strictest expenditure controls. As a result, the Stability and Growth Pact appears not to have produced much discipline; but it has created pro-cyclical pressures and generated uncertainty when its enforcement has been uneven. These results show that it may be preferable to have growth-friendly policies, and to give a more prominent place to debt reductions in a regime of fiscal restraint. |
Contents
Introduction 112 | 1 |
Fiscal Consolidations in Europe PostMaastricht | 9 |
Growth or Prudence? Budget Deficits Analysed | 21 |
Political Economy Aspects | 33 |
The Quality of Fiscal Policy Adjustments | 39 |
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adjusted budget deficit Alesina and Perotti analysis Austria average behaviour Belgium budget balance budget deficit budgetary CEPR Chapter commencing a consolidation consolidation episode consolidation fatigue consumption contractionary counter-cyclical countries currency union cycle cyclical position cyclically adjusted budget debt ratios deficit limit deficit ratio changes Denmark downturn dummy economic growth effects and deficit EMU participants euro area Europe European Commission evidence expansionary effects factors Figure Finland fiscal adjustment fiscal consolidations fiscal contractions fiscal discipline fiscal policy fiscal positions fiscal restraint fiscal stance France FSEU gap and fiscal Germany Greece growth accounting Growth effects Hughes Hallett impact implies increase Ireland Italy Maastricht criteria Maastricht Treaty monetary policy non-Keynesian observed OECD output gap period political Portugal pro-cyclical probability of violating programme public finances Real Interest Rate recession reduce regressions revenues single currency Spain Stability starting a consolidation structural reform successful suggests sustainability Sweden Table targets trend variables