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Macroeconomic Aspects of European Integration: Fiscal Policy, Trade Integration and the European Business Cycle

Author

Listed:
  • Jesús Crespo-Cuaresma
  • Michael Pfaffermayr
  • Octavio Fernández Amador
  • Catherine Keppel

Abstract

We analyze the role of fiscal policy and intra-European trade in business cycle synchronization in the EU for the period 1995-2008. There is a broad consensus that the relationship between fiscal policy and business cycle comovements and between trade integration and cyclical synchronization are subject to endogeneity problems. We instrument fiscal budget surplus by means of (exogenous) political determinants of fiscal policy acknowledged by the literature, while trade integration is instrumented using covariates which summarize the integration status of countries in the sample, GDP per capita differences with respect to the EU and trade specialization within the EU framework. Our results show that both fiscal policy and trade integration are important determinants of cyclical synchronization. We can conclude that once a high degree of trade integration is reached by countries involved in the European integration process, the role of fiscal policy is particularly relevant and differences in fiscal shocks should be analyzed in detail as a source of coherence in cyclical comovements in Europe. Furthermore, fiscal deficits are shown to be an important potential source of idiosyncratic macroeconomic fluctuations, especially in the eurozone. Our results confirm the rationale of monitoring fiscal developments to assess the adequacy of potential future EMU countries and the need for a broad agreement concerning fiscal policy at the EU level.

Suggested Citation

  • Jesús Crespo-Cuaresma & Michael Pfaffermayr & Octavio Fernández Amador & Catherine Keppel, 2011. "Macroeconomic Aspects of European Integration: Fiscal Policy, Trade Integration and the European Business Cycle," FIW Research Reports series III-004, FIW.
    • Handle: RePEc:wsr:ecbook:2011:i:iii-004
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    References listed on IDEAS

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    Cited by:

    1. Ludek Kouba & Michal Madr & Danuse Nerudova & Petr Rozmahel, 2016. "Policy Autonomy, Coordination or Harmonization in the Persistently Heterogeneous European Union?," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 1, pages 53-71, March.
    2. N. Antonakakis & G. Tondl, 2014. "Does integration and economic policy coordination promote business cycle synchronization in the EU?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(3), pages 541-575, August.
    3. João Sousa Andrade & António Portugal Duarte, 2015. "Optimum Currency Areas, Real and Nominal Convergence in the European Union," Notas Econ micas, Faculty of Economics, University of Coimbra, issue 42, pages 8-29, December.
    4. Dybczak, Kamil & Melecky, Martin, 2014. "EU fiscal stance vulnerability: Are the old members the gold members?," Economic Modelling, Elsevier, vol. 38(C), pages 87-101.
    5. Lukmanova, Elizaveta & Tondl, Gabriele, 2017. "Macroeconomic imbalances and business cycle synchronization. Why common economic governance is imperative for the Eurozone," Economic Modelling, Elsevier, vol. 62(C), pages 130-144.
    6. Etoundi Atenga, Eric Martial, 2017. "On the Determinants of output Co-movements in the CEMAC Zone:Examining the Role of Trade, Policy Channel, Economic Structure and Common Factors," MPRA Paper 82091, University Library of Munich, Germany.
    7. Sybille Lehwald, 2013. "Has the Euro changed business cycle synchronization? Evidence from the core and the periphery," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 40(4), pages 655-684, November.
    8. João Sousa Andrade & António Portugal Duarte, 2015. "Optimum Currency Areas, Real and Nominal Convergence in the European Union," Notas Económicas, Faculty of Economics, University of Coimbra, issue 42, pages 8-29, December.
    9. Dybczak, Kamil & Melecky, Martin, 2011. "Macroeconomic Shocks and the Fiscal Stance within the EU: A Panel Regression Analysis," MPRA Paper 33684, University Library of Munich, Germany.
    10. Degiannakis, Stavros & Duffy, David & Filis, George & Livada, Alexandra, 2016. "Business cycle synchronisation in EMU: Can fiscal policy bring member-countries closer?," Economic Modelling, Elsevier, vol. 52(PB), pages 551-563.
    11. Antje Hildebrandt & Isabella Moder, 2015. "Business cycle synchronization between the Western Balkans and the European Union," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 8-25.
    12. Luděk Kouba & Michal Mádr & Danuše Nerudová & Petr Rozmahel, 2015. "Policy Autonomy, Coordination or Harmonisation in the Persistently Heterogeneous European Union? WWWforEurope Working Paper No. 95," WIFO Studies, WIFO, number 58136, Juni.
    13. Igor Velickovski & Aleksandar Stojkov & Ivana Rajkovic, 2017. "DIS Union of the Core and the Periphery," International Journal of Economics and Financial Issues, Econjournals, vol. 7(6), pages 159-174.
    14. Petr Rozmahel & Ladislava Issever Grochová & Marek Litzman, 2014. "The Effect of Asymmetries in Fiscal Policy Conducts on Business Cycle Correlation in the EU. WWWforEurope Working Paper No. 62," WIFO Studies, WIFO, number 47249, Juni.

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    More about this item

    Keywords

    Monetary union; business cycles; synchronization; trade integration; fiscal policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F15 - International Economics - - Trade - - - Economic Integration

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