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Received wisdom and beyond: Lessons from fiscal consolidation in the EU

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  • Martin Larch
  • Alessandro Turrini

Abstract

The paper examines consolidation episodes in the EU since 1970 with a view to shedding light on the factors that determine the success or failure of fiscal adjustment. Compared to the existing literature on successful fiscal consolidations we add a number of new dimensions. Two deserve particular attention. Firstly, we explore a broader set of potential ingredients of the recipe for success. In addition to the composition of adjustment, which has extensively been examined in the literature, we consider further elements such as the quality and strength of fiscal governance and the implementation of structural reforms. Secondly, our analysis seeks to differentiate between at least two different types of consolidation episodes, one in which a relatively big fiscal correction is implemented in a short period of time, dubbed 'cold shower' consolidation, as compared to more gradual episodes of adjustment. Such a differentiation is motivated by the conjecture that the recipe for success may be conditional on the type of adjustment chosen. Our analysis broadly confirms the results established in the literature for what concerns (i) the conditions triggering a consolidation episode and (ii) the composition of adjustment, with minor but important 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

Suggested Citation

  • Martin Larch & Alessandro Turrini, 2008. "Received wisdom and beyond: Lessons from fiscal consolidation in the EU," European Economy - Economic Papers 2008 - 2015 320, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0320
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    References listed on IDEAS

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    Cited by:

    1. Eddie Casey & Joe Durkan & David Duffy, 2013. "Fiscal Consolidation Strategies: Evidence from the International Experience," Open Access publications 10197/5999, School of Economics, University College Dublin.
    2. Charles Amo Yartey & Mr. Machiko Narita & Mr. Joel Chiedu Okwuokei & Mr. Shelton M Nicholls, 2012. "The Challenges of Fiscal Consolidation and Debt Reduction in the Caribbean," IMF Working Papers 2012/276, International Monetary Fund.
    3. F. Heylen & A. Hoebeeck & T. Buyse, 2011. "Fiscal consolidation, institutions and institutional reform: a multivariate analysis of public debt dynamics," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/763, Ghent University, Faculty of Economics and Business Administration.
    4. T. Buyse & F. Heylen, 2012. "Leaving the empirical (battle)ground: Output and welfare effects of fiscal consolidation in general equilibrium," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/826, Ghent University, Faculty of Economics and Business Administration.
    5. David Lodge & Marta Rodriguez-Vives, 2013. "How long can austerity persist? The factors that sustain fiscal consolidations," European Journal of Government and Economics, Europa Grande, vol. 2(1), pages 5-24, June.
    6. Miguel Viegas & Ana Paula Ribeiro, 2017. "Fiscal Consolidations: A Theoretical Essay with a Heterogeneous-Agent Model," International Economic Journal, Taylor & Francis Journals, vol. 31(2), pages 206-223, April.
    7. Schuh, Ulrich, 2011. "Was bringt die Schuldenbremse?," Policy Notes 1, EcoAustria – Institute for Economic Research.
    8. Crafts, Nicholas, 2012. "Western Europe's Growth Prospects: an Historical Perspective," CEPR Discussion Papers 8827, C.E.P.R. Discussion Papers.
    9. Heylen, Freddy & Hoebeeck, Annelies & Buyse, Tim, 2013. "Government efficiency, institutions, and the effects of fiscal consolidation on public debt," European Journal of Political Economy, Elsevier, vol. 31(C), pages 40-59.
    10. Rajmund MIRDALA, 2016. "Effects of Fiscal Policy Shocks in the Euro Area Lessons Learned from Fiscal Consolidation," Journal of Advanced Research in Law and Economics, ASERS Publishing, vol. 7(8), pages 2236-2276.
    11. Oriol Carreras & Simon Kirby & Iana Liadze & Rebecca Piggott, 2016. "Fiscal Policy Spillovers," National Institute of Economic and Social Research (NIESR) Discussion Papers 468, National Institute of Economic and Social Research.
    12. Boris Cournède & Antoine Goujard & Álvaro Pina, 2013. "How to Achieve Growth- and Equity-friendly Fiscal Consolidation?: A Proposed Methodology for Instrument Choice with an Illustrative Application to OECD Countries," OECD Economics Department Working Papers 1088, OECD Publishing.
    13. Niamh Hardiman & Muiris MacCarthaigh, 2013. "How Governments Retrench In Crisis: The Case of Ireland," Working Papers 201315, Geary Institute, University College Dublin.
    14. Kaplanoglou, Georgia & Rapanos, Vassilis T., 2011. "The Greek fiscal crisis and the role of fiscal governance," LSE Research Online Documents on Economics 36432, London School of Economics and Political Science, LSE Library.
    15. Oriol Carreras & Iana Liadze & Simon Kirby & Rebecca Piggott, 2016. "Quantifying Fiscal Multipliers," National Institute of Economic and Social Research (NIESR) Discussion Papers 469, National Institute of Economic and Social Research.
    16. Pessoa, Argentino, 2011. "The Euro Area sovereign debt crisis: Some implications of its systemic dimension," MPRA Paper 35328, University Library of Munich, Germany.

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    More about this item

    Keywords

    Fiscal consolidation; fiscal rules; budgetary procedures; structural reforms; Larch; Turrini;
    All these keywords.

    JEL classification:

    • 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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