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Does politics matter? A comparative assessment of discretionary fiscal policies in the euro area

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  • Carnazza, Giovanni
  • Liberati, Paolo
  • Sacchi, Agnese

Abstract

When using discretionary fiscal policies in the countries belonging to the European Union, any change affecting the current fiscal stance must run into the boundary designed by fiscal rules. This would imply that discretionary fiscal policies - being mainly driven by the need to comply with fiscal rules - might be scarcely affected by politics and the political characteristics of a country. We empirically test this hypothesis on a sample of 19 European countries observed over years 1995–2019. Using different econometric techniques and alternative specifications, we find a strong and robust fiscal pro-cyclicality. More importantly, the pro-cyclicality of the fiscal policy is not significantly affected neither by the behaviour of macroeconomic fundamentals nor by institutional and political variables. From a policy viewpoint, it seems that the mechanisms introduced to guarantee fiscal sustainability in the euro area can overcome all possible political influences on both the size and the sign of implementable fiscal policies. This would suggest that politics does not matter to shape the public budget, at least not so much as the fiscal rules.

Suggested Citation

  • Carnazza, Giovanni & Liberati, Paolo & Sacchi, Agnese, 2025. "Does politics matter? A comparative assessment of discretionary fiscal policies in the euro area," European Journal of Political Economy, Elsevier, vol. 90(PA).
    • Handle: RePEc:eee:poleco:v:90:y:2025:i:pa:s0176268023000794
    DOI: 10.1016/j.ejpoleco.2023.102435
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    Keywords

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    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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