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Fiscal Policy and Macroeconomic Performance in the Euro area - Lessons for the Future

Author

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  • Eckhard Hein

    () (IMK at the Hans Boeckler Foundation)

  • Achim Truger

    () (IMK at the Hans Boeckler Foundation)

Abstract

Since the start of the European Monetary Union fiscal policy in the Euro area has been dominated by the Stability and Growth Pact (SGP). Quite obviously the SGP has been unsuccessful in fulfilling its goals, fiscal sustainability and supporting economic growth. More and more countries have exceeded the 3 percent of GDP limit for the budget deficit, while at the same time macroeconomic performance has been unsatisfactory. We analyse fiscal policy and its macroeconomic impact for the Euro area as a whole and for selected countries and compare it with US fiscal policy, with a special emphasis on the period 2001-2005. Whereas US fiscal policy has been strongly counter-cyclical, thus stabilising the economy, in the Euro area fiscal policy has been much more restrictive and has had pro-cyclical and therefore destabilising effects for many countries. However, one cannot put all the blame on fiscal policy. The ECB's restrictive monetary policy and divergent and destabilising wage developments across the Euro area are at least as important as fiscal policy in the explanation of the Euro area's weak economic performance. As a possible solution for the future, we suggest to replace the SGP by expenditure paths as coordination tool, and we discuss an important modification of the concept. Such expenditure paths could co-ordinate fiscal policies across the Euro area in a counter-cyclical way and at the same time ensure fiscal sustainability. Unfortunately, as long as monetary and wage policies remain un-coordinated and destabilising, any improvements in fiscal policy will not be very effective in enhancing economic performance.

Suggested Citation

  • Eckhard Hein & Achim Truger, 2006. "Fiscal Policy and Macroeconomic Performance in the Euro area - Lessons for the Future," IMK Working Paper 07-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:07-2006
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Eckhard Hein & Achim Truger, 2011. "Fiscal Policy in the Macroeconomic Policy Mix: A Critique of the New Consensus Model and a Comparison of Macroeconomic Policies in France, Germany, the UK and Sweden from a Post-Keynesian Perspective," Chapters,in: Credit, Money and Macroeconomic Policy, chapter 12 Edward Elgar Publishing.
    2. Eckhard Hein & Achim Truger & Till van Treeck, 2011. "The European Financial and Economic Crisis: Alternative Solutions from a (Post-) Keynesian Perspective," IMK Working Paper 9-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Eckhard Hein & Achim Truger, 2007. "Monetary Policy, Macroeconomic Policy Mix and Economic Performance in the Euro Area," Chapters,in: Money, Distribution and Economic Policy, chapter 11 Edward Elgar Publishing.
    4. Eckhard Hein & Achim Truger, 2014. "Fiscal Policy and Rebalancing in the Euro Area: A Critique of the German Debt Brake from a Post-Keynesian Perspective," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(1), pages 21-38, Februar.
    5. Andrea Terzi, 2007. "WP 2007-4 Fiscal deficits in the U.S. and Europe: Revisiting the link with interest rates," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2007-4, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    6. Jörg Bibow, 2013. "Lost at Sea:The Euro Needs a Euro Treasury," FMG Special Papers sp227, Financial Markets Group.
    7. Jens-Ole Koehrsen, 2011. "Paradigmenwechsel in der wirtschaftswissenschaftlichen Politikberatung?," IMK Studies 2-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    8. repec:mes:postke:v:35:y:2012:i:2:p:187-213 is not listed on IDEAS
    9. Jörg Bibow, 2013. "Lost at Sea: The Euro Needs a Euro Treasury," IMK Studies 35-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    10. Hein, Eckhard, 2011. "Distribution, ‘Financialisation’ and the Financial and Economic Crisis – Implications for Post-crisis Economic Policies," MPRA Paper 31180, University Library of Munich, Germany.
    11. Eckhard Hein & Achim Truger, 2012. "Finance-dominated capitalism in crisis—the case for a global Keynesian New Deal," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 35(2), pages 187-213.
    12. Eckhard Hein & Daniel Detzer, 2014. "Coping with imbalances in the Euro area: Policy alternatives addressing divergences and disparities between member countries," Working papers wpaper63, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    13. Jorg Bibow, 2013. "Lost at Sea: The Euro Needs a Euro Treasury," Economics Working Paper Archive wp_780, Levy Economics Institute.
    14. Hein, Eckhard & Truger, Achim, 2013. "Future fiscal and debt policies: Germany in the Context of the European Monetary Union," IPE Working Papers 24/2013, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    15. Achim Truger, 2014. "Austerity, cyclical adjustment and the remaining leeway for expansionary fiscal policies in the Euro area," IMK Working Paper 140-2014, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    16. Carlo Panico & Francesco Purificato, 2012. "The Role of Institutional and Political Factors in the European Debt Crisis," Working Papers wp280, Political Economy Research Institute, University of Massachusetts at Amherst.

    More about this item

    Keywords

    Fiscal policy; consolidation strategies; macroeconomic policy mix; euro area;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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