EU fiscal consolidation after the financial crisis. Lessons from past experiences
Summary for non-specialistsThe global financial crisis has led to a sharp deterioration of EU countries' public finances. Views are split regarding the most appropriate consolidation strategy to follow, in particular considering: the timing of fiscal consolidation in relation to the path of economic recovery reflecting (a) the trade-off between consolidation and stabilisation; (b) fiscal consolidation in the context of a distressed banking system where the credit channel is hampered and without which economic recovery can hardly take place, (c) the absence of exchange rate adjustment in the euro area which could make it more difficult for countries with competitiveness problems to achieve successful fiscal consolidation. The existing literature on fiscal consolidations provides only partial evidence on these issues.In this paper our objective is to focus on the above points of discussion drawing on EU (and non-EU OECD) experiences during the period 1970-2008. We estimate econometrically the determinants of successful fiscal consolidations and show that: (i) in presence of a systemic financial crisis, the repair of the banking sector is a pre-condition for a fiscal consolidation to succeed in reducing debt levels (ii) even after the banking sector is repaired, fiscal consolidations are usually less successful than in absence of financial crises, although more vigorous fiscal consolidations (i.e. cold shower) tend to yield higher results (iii) current debt dynamics in the EU are very unfavourable and in some cases, coupled with rising debt servicing costs and much deteriorated growth outlook warranting differentiated consolidation strategies across EU countries (iv) We do not find conclusive evidence in support of exchange rates (including real exchange rate) depreciation/devaluation as enhancing the success of fiscal consolidation as their effect appear to be low and insignificant.
|Date of creation:||Jul 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Fax: +32 2 298.08.23
Web page: http://ec.europa.eu/economy_finance/index_en.htm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alberto Alesina & Silvia Ardagna, 2010.
"Large Changes in Fiscal Policy: Taxes versus Spending,"
in: Tax Policy and the Economy, Volume 24, pages 35-68
National Bureau of Economic Research, Inc.
- Alberto F. Alesina & Silvia Ardagna, 2009. "Large Changes in Fiscal Policy: Taxes Versus Spending," NBER Working Papers 15438, National Bureau of Economic Research, Inc.
- Reinhart, Carmen M. & Rogoff, Kenneth S., 2013.
"Banking crises: An equal opportunity menace,"
Journal of Banking & Finance,
Elsevier, vol. 37(11), pages 4557-4573.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
- Reinhart, Carmen M. & Rogoff, Kenneth, 2009. "Banking Crises: An Equal Opportunity Menace," CEPR Discussion Papers 7131, C.E.P.R. Discussion Papers.
- Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union," Economic Policy, CEPR;CES;MSH, vol. 23, pages 297-362, 04.
- Heckman, James J, 1979.
"Sample Selection Bias as a Specification Error,"
Econometric Society, vol. 47(1), pages 153-61, January.
- von Hagen, Jurgen & Strauch, Rolf R, 2001. " Fiscal Consolidations: Quality, Economic Conditions, and Success," Public Choice, Springer, vol. 109(3-4), pages 327-46, December.
- Drazen, Allan & Grilli, Vittorio, 1993.
"The Benefit of Crises for Economic Reforms,"
American Economic Review,
American Economic Association, vol. 83(3), pages 598-607, June.
- Hjelm, Goran, 2002. " Effects of Fiscal Contractions: The Importance of Preceding Exchange Rate Movements," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 423-41, September.
- Pinelopi K. Goldberg & Michael M. Knetter, 1996.
"Goods Prices and Exchange Rates: What Have We Learned?,"
NBER Working Papers
5862, National Bureau of Economic Research, Inc.
- Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
- Rudiger Ahrend & Pietro Catte & Robert W.R. Price, 2006. "Interactions Between Monetary and Fiscal Policy: How Monetary Conditions Affect Fiscal Consolidation," OECD Economics Department Working Papers 521, OECD Publishing.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2002.
"The Modern History of Exchange Rate Arrangements: A Reinterpretation,"
NBER Working Papers
8963, National Bureau of Economic Research, Inc.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
- Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, March.
- Reinhart, Carmen M. & Rogoff, Kenneth S., 2010.
"Growth in a Time of Debt,"
11129154, Harvard University Department of Economics.
- Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
- Lane, Philip R. & Perotti, Roberto, 1998. "The trade balance and fiscal policy in the OECD," European Economic Review, Elsevier, vol. 42(3-5), pages 887-895, May.
- Andrea Boltho & Andrew Glyn, 2006. "Prudence or Profligacy: Deficits, Debt, and Fiscal Consolidation," Oxford Review of Economic Policy, Oxford University Press, vol. 22(3), pages 411-425, Autumn.
- Alexander Plekhanov & Manmohan S. Kumar & Daniel Leigh, 2007. "Fiscal Adjustments; Determinants and Macroeconomic Consequences," IMF Working Papers 07/178, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:euf:ecopap:0418. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ECFIN INFO)
If references are entirely missing, you can add them using this form.