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

Eckhard Hein and Achim Truger

No 07-2006, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

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.

Keywords: Fiscal policy; consolidation strategies; macroeconomic policy mix; euro area (search for similar items in EconPapers)
JEL-codes: E61 E62 E63 E65 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2006-05
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Chapter: Fiscal Policy and Macroeconomic Performance in the Euro Area: Lessons for the Future (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:imk:wpaper:07-2006

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