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Fiscal policy and external imbalances in a debt crisis: the Spanish case

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  • Pablo Hernández de Cos

    ()
    (Banco de España)

  • Juan F. Jimeno

    ()
    (Banco de España)

Abstract

In this paper we reflect on the role that fiscal policy could play in the resolution of the crisis in Eurozone countries crippled by both public and private debt, and beset by growth and competitiveness problems. As an illustration, we revisit the Spanish case, a paradigmatic example of the economic difficulties created by high debt and internal and external imbalances. After describing the build-up of fiscal and macroeconomic imbalances in Spain during the period 1995-2007, we first discuss how the correction of macroeconomic imbalances conditions progress on the fiscal consolidation front and, secondly, how fiscal consolidation affects the correction of imbalances. We conclude that the role that national fiscal policies can play in these countries to expand demand and reduce the costs of solving external and internal imbalances seems limited. Also, overall, the best contribution that fiscal policy can achieve under these constraints is through a better targeting of government expenditures and tax reforms, aimed at introducing permanent measures to stabilise debt ratios. These could then be combined with productivity-enhancing structural reforms and with improvements in product market regulation to increase competition, so that the short-term costs of the internal devaluation required are reduced

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosOcasionales/13/Fich/do1303e.pdf
File Function: First version, November 2013
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Occasional Papers with number 1303.

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Length: 27 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:bde:opaper:1303

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Keywords: macro imbalances; fiscal policy; euro crisis;

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  1. Sarai Criado & Adrian van Rixtel, 2008. "Structured finance and the financial turmoil of 2007-2008: and introductory overview," Banco de Espa�a Occasional Papers 0808, Banco de Espa�a.
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