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Fiscal Adjustment in Southern Europe: the Limits of EMU Conditionality

  • Spyros Blavoukos
  • George Pagoulatos
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    The EMU fiscal adjustment paths of the four Southern Europe members (Italy, Spain, Greece, and Portugal – SE-4) vary along two dimensions: a) cross-temporal (pre- and post-EMU accession) and b) cross-country. We account for the cross-temporal variation by distinguishing between the ‘hard’ and ‘softer’ EMU conditionality of the pre- and post-accession stage. External constraints in the form of the Maastricht eligibility criteria constituted a significant common ‘push’ factor in the fiscal stabilization process of EMU candidate countries throughout the 1990s. However, their potent does not necessarily lead to fiscal sustainability as demonstrated by the postaccession budgetary outlook of the SE-4. We account for the crosscountry variation by introducing additional ‘pull’ factors related to the reform content, context and capability (such as unemployment, the level of social concertation, and government effectiveness). Only in cases where such factors were at work did governments engage in structural reforms to consolidate public finances instead of the less controversial path of macroeconomic policy reform.

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    File URL: http://www.lse.ac.uk/europeanInstitute/research/hellenicObservatory/pdf/GreeSE/GreeSE12.pdf
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    Paper provided by Hellenic Observatory, LSE in its series GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe with number 12.

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    Date of creation: Mar 2008
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    Handle: RePEc:hel:greese:12
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    Web page: http://www.lse.ac.uk/europeanInstitute/research/hellenicObservatory/

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    1. von Hagen, Jürgen, 2005. "Fiscal Rules and Fiscal Performance in the EU and Japan," CEPR Discussion Papers 5330, C.E.P.R. Discussion Papers.
    2. Smith, K.E., 1997. "The Use of Political Conditionality in the EU's Relations with Third Countries: How Effective?," Papers 97/7, European Institute - Political and Social Sciences.
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    4. Alberto Alesina & Roberto Perotti & José Tavares, 1998. "The Political Economy of Fiscal Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 197-266.
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    8. Busemeyer, Marius R., 2004. "Chasing Maastricht: The Impact of the EMU on the Fiscal Performance of Member States," European Integration online Papers (EIoP), European Community Studies Association Austria (ECSA-A), vol. 8, 07.
    9. Ralph Rotte & Klaus Zimmermann, 1998. "Fiscal restraint and the political economy of EMU," Public Choice, Springer, vol. 94(3), pages 385-406, March.
    10. Frank Schimmelfennig & Stefan Engert & Heiko Knobel, 2003. "Costs, Commitment and Compliance: The Impact of EU Democratic Conditionality on Latvia, Slovakia and Turkey," Journal of Common Market Studies, Wiley Blackwell, vol. 41(3), pages 495-518, 06.
    11. Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
    12. James Hughes & Gwendolyn Sasse & Claire Gordon, 2004. "Conditionality and Compliance in the EU's Eastward Enlargement: Regional Policy and the Reform of Sub-national Government," Journal of Common Market Studies, Wiley Blackwell, vol. 42(3), pages 523-551, 09.
    13. Alesina, Alberto Francesco & Perotti, Roberto & Tavares, Jose, 1998. "The Political Economy of Fiscal Adjustments," Scholarly Articles 12553724, Harvard University Department of Economics.
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