Title: Constricted, lame and pro-cyclical? Fiscal policy in the euro area revisited

Authors: Servaas Deroose, Martin Larch, Andrea Schachter

Addresses: Directorate-General for Economic and Financial Affairs, European Commission, Rue de la Loi 200, Brussels 1049, Belgium. ' Directorate-General for Economic and Financial Affairs, European Commission, Rue de la Loi 200, Brussels 1049, Belgium. ' International Monetary Fund, Fiscal Affairs Department, Fiscal Policy and Surveillance Division, 700 19th Street, NW, Washington, DC 20431, USA

Abstract: It is often argued that fiscal stabilisation in the euro area compares unfavourably with the USA, not least because of the perceived limitations of the stability and growth pact. This paper qualifies this perception. It examines a number of elements which are generally overlooked or not considered in the analysis of fiscal stabilisation. On top of discretionary fiscal policy, which is generally at the core of existing studies, it also takes into account the size of automatic stabilisers. Moreover, it considers the difference between policy intentions, as formulated or perceived in real time, and actual outturns, and possible reasons for the gap between the two. On the basis of such an analysis, fiscal stabilisation in the euro area appears less dire than commonly assumed. This paper also advances a number of points on how to improve the track record of fiscal policy making in the euro area, in particular on how to make is less pro-cyclical and, in the end, more sustainable.

Keywords: fiscal policy; fiscal stabilisation; euro area; automatic stabilisers; output gap; sustainability; sustainable development.

DOI: 10.1504/IJSE.2011.039439

International Journal of Sustainable Economy, 2011 Vol.3 No.2, pp.162 - 184

Published online: 05 Apr 2011 *

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