Constricted, lame and pro-cyclical? Fiscal policy in the euro area revisited Online publication date: Tue, 05-Apr-2011
by Servaas Deroose, Martin Larch, Andrea Schachter
International Journal of Sustainable Economy (IJSE), Vol. 3, No. 2, 2011
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.
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