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Potential Output, EU Fiscal Surveillance and the COVID-19 Shock

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  • Philipp Heimberger

    (The Vienna Institute for International Economic Studies)

Abstract

This paper discusses how the technical foundations of the EU’s fiscal rules constrain the fiscal space in EU countries in the context of the COVID-19 pandemic. We review the evidence on how estimates of potential output, which are at the heart of essential control indicators in EU fiscal surveillance, were revised in the ten years running up to the COVID-19 pandemic, and how these revisions affected the fiscal stance of EU countries. We provide first evidence for downward revisions in the European Commission’s potential output estimates against the background of the COVID-19 shock across the EU27 countries, and we assess the potential consequences in terms of fiscal space. According to our results, one additional percentage point in predicted losses of actual output is associated with a loss in potential output of about 0.6 percentage points. Given the importance of model-based estimates in the EU’s fiscal rules, avoiding pro-cyclical fiscal tightening will require that policymakers’ hands are not tied by overly pessimistic views on the development of potential output.

Suggested Citation

  • Philipp Heimberger, 2020. "Potential Output, EU Fiscal Surveillance and the COVID-19 Shock," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 55(3), pages 167-174, May.
    • Handle: RePEc:spr:intere:v:55:y:2020:i:3:d:10.1007_s10272-020-0895-z
    DOI: 10.1007/s10272-020-0895-z
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    Cited by:

    1. Orsola Costantini, 2020. "The Eurozone as a Trap and a Hostage: Obstacles and Prospects of the Debate on European Fiscal Rules," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 55(5), pages 284-291, September.
    2. Valeriy Kozytskyy & Marianna Oliskevych & Galyna Beregova & Nelya Pabyrivska, 2023. "Output and Energy Prices Fluctuations in Response to Market Shocks: System Dynamic Modeling," International Journal of Energy Economics and Policy, Econjournals, vol. 13(2), pages 462-466, March.
    3. Christian Breuer, 2021. "Staatsverschuldung nach Corona: Rückkehr zur Goldenen Regel [Public debt after Corona: Return to the Golden Rule]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 101(1), pages 2-3, January.
    4. Christian Breuer, 2020. "Goverment Debt Post COVID-19: Back To Golden Rules," Chemnitz Economic Papers 041, Department of Economics, Chemnitz University of Technology, revised Feb 2020.
    5. Gräbner, Claudius & Hafele, Jakob, 2020. "The emergence of core-periphery structures in the European Union: A complexity perspective," ZOE Discussion Papers 6, ZOE. institute for future-fit economies, Bonn.
    6. Davide Fantino & Sara Formai & Alessandro Mistretta, 2021. "Firm characteristics and potential output: a growth accounting approach," Questioni di Economia e Finanza (Occasional Papers) 616, Bank of Italy, Economic Research and International Relations Area.
    7. Patrik Barisic & Tibor Kovac, 2022. "The effectiveness of the fiscal policy response to COVID-19 through the lens of short and long run labor market effects of COVID-19 measures," Public Sector Economics, Institute of Public Finance, vol. 46(1), pages 43-81.
    8. Christian Breuer, 2021. "Structural Indicators and the Fiscal Uncertainty Principle," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 56(4), pages 182-183, July.

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