Received Wisdom and Beyond: Lessons from Fiscal Consolidation in the EU
AbstractRestoring sustainable public finances in the aftermath of the Great Recession is a key challenge in most EU countries. In order to learn from history, our paper examines consolidation episodes in the EU since 1970. We shed light on the factors that favour the start of a consolidation episode and determine its success. Compared to the existing literature, we add a number of new dimensions in the analysis. First, we explore a broader set of potential ingredients of the ‘recipe for success’, including the quality and strength of fiscal governance and the implementation of structural reforms. Secondly, we check whether the ‘recipe for success’ changed over time. Our analysis broadly confirms received wisdom concerning the conditions triggering a consolidation episode and the role of the composition of adjustment for success, with some qualifications related to the role played by government wages. In addition it provides evidence that well-designed fiscal governance as well as structural reforms improve the odds of both starting a consolidation episode and achieving a lasting fiscal correction. We also show that, over time, successful and unsuccessful consolidation episodes have become more similar in terms of adjustment composition.
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Bibliographic InfoArticle provided by National Institute of Economic and Social Research in its journal National Institute Economic Review.
Volume (Year): 217 (2011)
Issue (Month): 1 (July)
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Fiscal consolidations; fiscal rules; budgetary procedures; structural reforms;
Other versions of this item:
- Martin Larch & Alessandro Turrini, 2008. "Received wisdom and beyond: Lessons from fiscal consolidation in the EU," European Economy - Economic Papers 320, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
- Larch, Martin & Turrini, Alessandro, 2008. "Received wisdom and beyond: Lessons from fiscal consolidations in the EU," MPRA Paper 20604, University Library of Munich, Germany.
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
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