Fiscal Rules in Economic Crisis: The Trade-off Between Consolidation and Recovery, from a European Perspective
-
Carmen Díaz-Roldán
,
Fernando Ferrari Filho
Abstract
In this study, we will perform a simulation exercise to investigate whether the use of explicit fiscal rules improves the macroeconomic performance in the economic framework of the European Union (EU), where the fall in income levels occurred very asymmetrically, and this has accentuated the social inequality that existed before the recent crises. To evaluate the performance of fiscal rules, we will allow for a fiscal rule keeping the growth of the public expenditure below the growth of the inflation. This special design of the fiscal rule is a novelty in the European context, although the inflation constraint has been successfully implemented in other countries as, for example, Brazil. As the results, we expect to find that before the financial crisis of 2008, the EU public finances keep relatively stable. However, after the crisis, the budget of the member states suffered a significant deterioration. In addition, therefore, we will discuss to which extent the use of proper fiscal rules could help to rationalize fiscal consolidation efforts.
1 Introduction
Since the 1990s, in parallel with the globalization process, the world economy has faced several economic crises. Among the crisis should be noticed the Mexican peso crisis in 1994–1995, the Asian crisis in 1997, the Brazilian crisis in 1998–1999, the Argentinean crisis in 2001–2002, the 2007–2008 international financial crisis (IFC) and, as a result, the 2009 Great Recession (GR), the Euro crisis in 2011–2012, and, recently, the economic crisis provoked by the COVID-19 pandemic.
The effects of these crises were not neutral in economic and social terms. Moreover, focusing attention on the IFC and, as a consequence, the GR, it is possible to observe that both crises have substantially altered the dynamic process of the international economy and represent a major turning point. Governments of both the G7 countries and the emerging countries have responded to the IFC and GR with massive countercyclical fiscal and monetary policies.
Given that, the purpose of this study is to analyze the macroeconomic policies, more specifically the fiscal policy. Aimed for that, in this study, we will perform a simulation exercise to investigate, in qualitative terms, whether the use of explicit fiscal rules improves the macroeconomic performance in the economic framework of the European Union (EU), where, after the IFC, the GR, and the Euro crisis, the fall in income levels occurred very asymmetrically; and this has accentuated the social inequality that existed before the recent crises.
For some years, among the fiscal consolidation strategies proposed at both the political and academic levels, the use of fiscal policy rules to address high levels of accumulated debt has gained interest. One of the reasons, for fiscal authorities, is to gain a reputation because the fiscal rules, as concrete measures of stabilization policies, are a way to assure credibility (European Central Bank, 2013; Galli & Grembi, 2013, among others). The literature on the usefulness of fiscal rules is extensive. The discussion covers areas such as its need (Grembi, Nannicini, & Troiano 2016), the comparison with discretionary fiscal policy (Hallac & Yared, 2014, 2018, 2019), or its importance in federal government structures, which is of great interest in the Eurozone area (Dovis & Kirpalani, 2020). The question of the effectiveness of the fiscal rules is not a consensus in the literature, as highlighted by Grembi et al. (2016), because of the problem of commitment and, above all, related to the different structures of public administrations in countries. The authors emphasize the effectiveness of fiscal rules when they are enforced by a national government, and they are included in the national legislation. Other of the key points for the success of fiscal policies relies on the design of the rules (Blanchard, Leandro, & Zettelmeyer, 2021; Hallac & Yared, 2021), with special attention to the role played by the composition of expenditure, because its structure is fundamental to assessing the growth constraints that may result from the use of fiscal rules (see Ardanaz, Cavallo, Izquierdo, & Puig, 2019; Asatryan, Castellón, & Stratmann, 2018; Eliason & Lutz, 2018 among others).
In this study, to evaluate the performance of fiscal rules, designed to control excessive government deficits, we will follow a fiscal rule along the lines of Ballabriga & Martinez-Mongay (2003). The rule has been conceived with stabilization purposes, and it is designed in terms of the accumulated debt, and the inertia of the previous deficit. Those elements allow for a smoothed evolution of the fiscal deficit. Our fiscal rule also relates the fiscal deficit with the output growth. In that sense, our rule incorporates a simple mechanism that links the evolution of the government deficit with the economic cycle, allowing for countercyclical fiscal policies.
We use that methodology to perform a counterfactual exercise calculating the figures for fiscal deficit/surplus when fiscal authorities follow an explicit fiscal rule. However, as our first methodological contribution, we will extend the rule by Ballabriga & Martinez-Mongay (2003) allowing for an additional constraint. That is, the fiscal authorities will be also constrained by a fiscal rule keeping the growth of the public expenditure below the growth of the inflation. This special design of the fiscal rule is a novelty in the European context, although the inflation constraint has been successfully implemented in other countries as, for example, Brazil.
Our second methodological contribution would be to explore the outcome of the explicit fiscal policy rule under different scenarios. Thus, we have characterized three different fiscal rules describing three different scenarios depending on the preferences of the fiscal authorities: the austere or disciplined, the symmetric or indifferent, or the economic growth attitude for promoting a sustainable fiscal adjustment.
The analysis will be done in the EU countries, using data provided by Eurostat, paying special attention to the fiscal performance of the different sets of countries formed by the EU founding members, the Eurozone members, the peripheral EU countries, the Central and Eastern European (CEE) members, and the so-called frugal countries.
As the results we expect to find that before the financial crisis of 2008, the EU public finances keep relatively stable. However, after the crisis, the budget of the member states suffered a significant deterioration. Moreover, in that environment, we will analyze whether the use of proper fiscal rules could help to rationalize fiscal consolidation efforts.
To aim its goal, this study, besides this brief introduction, has three more sections. Section 2 presents, briefly, some considerations of the European Stability and Growth pact. Section 3 shows the performance of fiscal rules during and after the recent crisis. Finally, Section 4 summarizes and concludes.
2 The European Stability and Growth Pact (SGP): Some Brief Considerations
According to Arestis and Sawyer (2005, 2017), the main theoretical features of the EU macroeconomic performance can be summarized as follows: (1) Price stability is the monetary policy’s long-term primary objective of the common monetary policy (the called inflation target regime), (2) the inflation target regime is a monetary policy framework whereby public announcement of official inflation targets is required. In this approach, “expected inflation” and the transparency of inflation forecasts are an important element of the policy, (3) fiscal policy is the only independent demand side policy for stabilizing the economy in the member states of the monetary union, and (4) the level of effective demand plays no role in determining the long-term economic activity, and therefore, that adjustment should be determined by the supply side.
Particularly, in the context of the European Monetary Union (EMU), since 1999, the member countries adopted a fiscal policy in accordance with the objectives established by the SGP. In fact, the Maastricht Treaty emphasizes that EMU member states must avoid excessive deficits, and the reference values for the deficit/GDP and debt/GDP ratios have worked in practice as an explicit fiscal rule: a budget deficit of less than 3.0% of GDP and a government debt, lower than 60.0% of GDP. In addition, the SGP establishes a set of mechanisms for monitoring and supervising the fiscal results, as well as a corrective component for those countries that incur an “excessive deficit,” that is, that did not comply with the implicit fiscal rule.
After the crisis of 2008, each country adopted different tools to stimulate the economy. However, on one hand, the European Central Bank (ECB) launched a series of enhanced credit support measures but on March 2015 changed to a Quantitative Easing (QE) policy, which consisted in a large-scale asset purchases to increase liquidity. The expansion of the ECB balance sheet was moderated given the existence of large disparities in the Eurozone countries and in its banking systems, and the lack of a public treasury. On the other hand, the actions of governments focused on the introduction of macroeconomic programs, important structural reforms, and fiscal consolidation (Esteve & Prats, 2015).
As a consequence of the debt crisis in the EMU countries, the SGP has been reformed to promote economic recovery from the supply side, with a strong fiscal restriction leading to a period of austerity (Sawyer, 2015). A new, more restrictive fiscal rule was established, which limits the structural deficit to a maximum of 0.5% of GDP, in the medium term, for countries with debt greater than 60.0% of GDP, and 1.0% for those with debt less than 60.0% of GDP. In addition, countries with the excessive deficit procedure (EDP) must present budget deficit reduction plans and, also, present an economic partnership program, which includes detailed fiscal and structural reforms, such as the pension system, taxes, and social services, to correct their deficits on a lasting basis. These programs will be submitted to the European Commission for their approval and monitoring.
Additional sets of measures have been introduced in the SGP to strengthen the mechanisms of surveillance and supervision, although, above all, the application of the EDP prevails. The so-called Six-Pack (December 2011) is aimed at increasing budgetary surveillance and supervision of the member states and the implementation of the EDP, in addition to a set of specific measures for the countries of the Eurozone (Two Pack, May 2013), with measures aimed to guarantee the correction of excessive deficits and economic and budgetary supervision to the rescued countries.
Besides, the Stability, Coordination and Governance Treaty was signed (January 2013) forcing the countries to introduce in the national legal systems the requirement to have a balanced budget rule (the so-called Fiscal Pact). However, as De Grauwe (2018) analyzes, the fact that the EMU is an incomplete monetary union, without a common financing mechanism, has produced differential interest rate among the Euro area countries, reflecting the risk differential attributed to the countries.
The dynamic, positive effects of the EMU must be highlighted, reflected in low interest rates in a context of greater inflationary stability and positive expectations. However, in this framework, the fiscal policy of the EMU has been reformed and strengthened by the Stability, Coordination and Governance Treaty. This set of new rules institutionalized the fiscal austerity followed by the countries of the Euro Area after the IFC, making fiscal policy procyclical.
The deepening of the debt crisis in the Euro Area, especially because fiscal austerity has led to the need to bail out Greece, Ireland, Portugal, and Spain, threatening the sustainability of the euro. For that reason, the ECB launched in March 2015 a QE monetary policy, with the purchase of public and private assets, acquiring more than 2.6 trillion euros until December 2019. That policy was aimed, as emphasized by Arestis & Sawyer (2017), to offer liquidity to the bank sector, to restore confidence to the financial system, and to contain the impact of the crisis on the real economy. Following Arestis (2017), one advantage of the QE is that it makes easier the management of demand policies of the government, in terms of their fiscal policies, because there is a ready buyer of the government debt. Without these facilities, there would be difficulties and may force governments to contain the degree of their fiscal initiatives.[1] Thus, the ECB monetary policy was crucial to reduce financial tensions at the Euro Area level.
In addition, associated with the demands of structural budgetary balance, a series of structural reforms (pensions, collective bargaining, taxes, etc.) were promoted to reduce public spending. In this sense, Eggertsson, Ferrero, & Raffo (2014), Galí (2013) and Krugman (2014) argue that structural reforms (which provoke internal devaluations, as in the case of Spain and other EMU countries) during periods of economic crisis can have a negative effect by increasing real interest rates, further depressing domestic demand and, therefore, production and employment, and especially in countries without the capacity to carry out exchange policy (Galí & Monacelli, 2016). In this line, more recently, Cuestas & Ordóñez (2018) find that the fiscal consolidation in Europe, from 2008 to 2014, contributed to increased unemployment. Some years before, Romer (2012, p. 9) had argued “that immediate severe fiscal austerity is a very bad idea in countries with high unemployment. Even in countries flirting with a crisis, immediately cutting spending and raising taxes in the current situation is very likely to do more harm than good.”
3 The Fiscal Rules and the Responses of the European Countries
In this section, we will follow the approach conducted by Díaz-Roldán, Ferrari-Filho, & Da Silva-Bichara (2019) to analyze the fiscal responses in the EU during the last years. It is important to mention that in the 2019 article, starting from the proposal found in Ballabriga & Martinez-Mongay (2003), it was shown the contribution of fiscal rules to stabilize the Brazilian economy. Thus, Díaz-Roldán et al. (2019) proposed a fiscal rule describing how the government deficit objective responds negatively to public debt deviations (in terms of the GDP) respect to its optimal level, to the previous deficit, to the growth rate variations, as well as to the inflation growth rate. The reason to include, in the 2019 article, the inflation growth rate as an argument was to capture the Brazilian government proposal of constraining the growth of government expenditures below the growth of inflation in the new fiscal regime (NFR) of 2016, designed to achieve tight fiscal consolidation. In this fashion, our proposed rule will produce, in a simple way, the deficit that would have been obtained by setting a debt target, as well as establishing a limit (given by the growth of inflation) on public spending.
3.1 The Fiscal Rule
Adapting the methodology of Díaz-Roldán et al. (2019) to the European case and assuming the current government deficit adjusts itself with the previous period value, our proposed fiscal rule will be the following:
where g is the primary deficit (relative to GDP) that depends on the differential of public debt in the previous period (relative to GDP) in relation to the debt level target, (d
−1 − d
o
), on the lagged primary deficit, on the lagged growth rate of GDP,
Being ρ the smoothing parameter that ranks from zero to one, 0 ≤ ρ ≤ 1, and given that (1 − ρ) + ρ = 1, therefore ρ < 1. In addition, where δ, θ, and ψ represent the proportions in which the primary deficit responds to the changes of the variables.
Moreover, we will also propose different fiscal scenarios depending on the preferences of the fiscal authorities: (1) the “disciplined” or austere scenario that would characterize debt aversion preferences by giving values as δ = ρ = 0.75 and θ = (1 − ρ) = 0.25, (2) the “symmetrical” scenario, in which δ = ρ = θ = (1 − ρ) = 0.5, and (3) the “growth promoting” scenario, in which δ = ρ = 0.25 and θ = (1 − ρ) = 0.75.[2]
As is well known, in EMU the Maastricht Treaty stressed as basic that the member states of EMU should avoid excessive deficits, no more than 3% of GDP, and the government debt should not exceed the 60% of GDP. Those reference values for deficit-to-GDP and debt-to-GDP ratios have worked in practice as an explicit fiscal rule. According to those requirements, we will use the figure of 60%, as the value for the government debt target in our simulations applied to the European countries. Therefore, the fiscal rules for the cases detailed above will be as follows:
“Disciplined” scenario:
(2)“Symmetrical” scenario:
(3)“Growth promoting” scenario:
3.2 The Data Set and the Groups of Countries
To highlight the consequences of the diversity of economic frameworks among EU members, in this study, we will perform our empirical application for six sets of European countries. The data have been extracted from Eurostat, and the period covers the years from 1999, the starting of the euro, to 2019, the last in which there are available data. The government deficit (−)/surplus (+) is defined as the difference between the revenue and the expenditure of the general government sector. The debt corresponds to the general government consolidated gross debt as percentage of GDP. The GDP, at market prices is measured as the percentage change on previous period of the chain linked volumes. Finally, the data on inflation correspond to the annual average rate of change of the harmonized index of consumer prices (2015 = 100).
The sets of countries are the following: the whole EU-27, the CORE, the Eurozone, the peripheral, the Eastern countries and the frugal countries. The second group is formed by five of the six founding states of the current EU, namely Belgium, France, Germany, Luxembourg, and the Netherlands. Those countries, known as the CORE of the EU, have shown relatively sustainable macroeconomic results after the recent crisis (Ahlborn & Wortmann, 2017).
The third group will be the Eurozone-19 countries: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Nevertheless, among the current 19 countries of the Eurozone, some of them exhibit both high national budget deficits relative to GDP, and rising government debt levels: namely Greece, Italy, Portugal, and Spain. Those are the southern and peripheral European countries, and they have been grouped as GIPS; although in 2008, it became GIIPS when Ireland was added after her banking crisis. For highlighting the relevance of high government deficits and debt level, for the recovery after the crisis, the peripheral European countries (GIIPS) will be our fourth group of analysis.
Our fifth set of countries will be constituted by the EU countries belonging to the CEE countries. Those countries, grouping the former socialist countries of Europe, experienced significant growth after their accession to the EU, which led to a high potential for convergence with their Western EU partners, although the fiscal consolidation required for recovering would mean a brake on their process of growth and convergence. For a deeper analysis, we have also split the countries according to their belonging to the Eurozone. The CEE countries belonging to Eurozone are as follows: Estonia, Latvia, Lithuania, Slovak Republic, and Slovenia, and the CEE countries not belonging to Eurozone are as follows: Bulgaria, Czech Republic, Hungary, Poland, and Romania.
Finally, we will also consider as the sixth group the one formed by the most fiscally conservative European countries: Austria, Denmark, the Netherlands, and Sweden. They are called the frugal four as they promote tight fiscal policies, and they are reluctant to a large distributive European budget based on the average debt level (Debomy, 2020).
3.3 The Empirical Application
Using these figures, in Table 1, we show the deficit generated by the fiscal rule given by equation (1), according to the proposed scenarios, in the different sets of European countries. Regarding the inflation constraint, we have allowed for a fully indexation of the government deficit, choosing ψ = 1, which implies that the deficit growth is the maximum allowed by the Brazilian rule of 2016. Figures 1 and 2 show the paths of the actual deficit and the deficit calculated from the proposed rules for the different sets of the EU countries.
Aimed to evaluate the usefulness of the inflation growth rate constraint (as in the Brazilian NFR of 2016) fiscal rule, we have also computed the deficit generated by the equation (1) assuming that there is not an inflation constraint. In other words, we have repeated the previous calculations for ψ = 0. Results are shown in Table 2, and Figures 1 and 2.
Looking at the tables and the figures, we find that the use of our proposed fiscal rules would not be advisable in all the European countries’ sets. For the EU, as whole, the proposed fiscal rules proved to be useful only before the Euro crisis in 2011–2012 (see Figures 1.1 and 2.1). Since the adoption of the SGP, the member states of the EMU had committed themselves to reach a medium-term budgetary position closest to balance avoiding excessive deficits, and the reference values for deficit-to-GDP and debt-to-GDP ratios, stressed in the Maastricht Treaty had worked in practice as an explicit fiscal rule. However, according to our results, any of our proposed rules would have worked better, being the “growth promoting” rule the best one. Furthermore, when the fiscal rule includes an inflation ceiling as the 2016 Brazilian fiscal rule does (ψ = 1 in terms of our fiscal rule), the rule augmented with the inflation constraint contributes to increase the government surplus, improving the net lending position of public accounts (Figure 1.1).
The mentioned above European commitments seemed to work for EU until 2011. However, after that year, EU turned to be net borrowing, and none of the explicit fiscal rules proposed in this study would have contributed to fiscal consolidation. After the crisis, the EU public debt experimented a noticeable increase exceeding the limit of 60%. Moreover, at the European level, after the reform of the SGP, as it is shown before, the new pact for the Euro was signed in 2011, pointed out as an essential need that member states should implement in national laws the budget rules established in the SGP. In this new scenario, the imposed limits on the structural deficit of 0.5% of GDP for countries with debt greater than 60.0% of GDP, and 1.0% for those with debt less than 60.0% of GDP have worked better than our proposed rules.
EU-27 countries government deficit ψ = 1 (Source: Own elaboration from data on Table 1).
EU-27 countries government deficit (Source: Own elaboration from data on Table 2).
CORE countries government deficit ψ = 1 (Source: Own elaboration from data on Table 1).
When looking at the CORE countries’ fiscal performance (showed in Figures 1.2 and 2.2), we find similar results to those obtained from the EU. Our proposed fiscal rules prove to be useful only before the Euro crisis, and the “best” rule is the “growth promoting” one. The reason seems to be again the great increase of the public debt above the 60% and the low GDP growth rates.
For the Eurozone and the GIIPS countries, the explicit proposed fiscal rules are not advisable. In both sets of countries, the public debt shows figures above the 60% along the whole period. And the hight debt, strongly difficult fiscal consolidation (see Figures 1.3 and 2.3, as well as 1.4 and 2.4).
CORE countries government deficit (Source: Own elaboration from data on Table 2).
Eurozone countries government deficit ψ = 1 (Source: Own elaboration from data on Table 1).
Eurozone countries government deficit (Source: Own elaboration from data on Table 2).
GIIPS countries government deficit ψ = 1 (Source: Own elaboration from data on Table 1).
GIIPS countries government deficit (Source: Own elaboration from data on Table 2).
On the contrary, for the CEE countries, our proposed fiscal rules prove to be always useful, and the fiscal rule that best behaves is again the “growth promoting” rule, augmented with the inflation constraint (as can be seen in Figures 1.5 to 1.7 and 2.5 to 2.7).
These results are in line with those found by Díaz-Roldán and Monteagudo-Cuerva (2018). They perform a similar exercise using a fiscal rule without inflation restriction for the CEE countries, from 2001 to 2013, and conclude that for the CEE countries, fiscal rules seem to reduce the public deficit in some cases, or even turn the deficit into a surplus. Moreover, for the EU-27, fiscal rules should have been advised only between 2007 and 2010, before the Euro crisis.
CEE countries government deficit ψ = 1 (Source: Own elaboration from data on Table 1).
CEE countries government deficit (Source: Own elaboration from data on Table 2).
CEE € countries government deficit ψ = 1 (Source: Own elaboration from data on Table 1).
CEE € countries government deficit (Source: Own elaboration from data on Table 2).
CEE no € countries government deficit ψ = 1 (Source: Own elaboration from data on Table 1).
CEE no € countries government deficit (Source: Own elaboration from data on Table 2).
A peculiar case is that for the frugal countries, the proposed fiscal rules do not work only between 2015 and 2017, given the increase (above 60%) of the public debt in the two preceding years. For the rest of the period, any of the proposed rules proves to be able to generate a capacity of financing (showed in Figures 1.8 and 2.8).
Frugal countries government deficit ψ = 1 (Source: Own elaboration from data on Table 1).
Frugal countries government deficit (Source: Own elaboration from data on Table 2).
It should be remembered that the QE policy was implemented in 2015, in an environment of fiscal deficits, high unemployment, and low economic growth. In the previous years, the reforms of the SGP, in 2011 and 2013, and the Fiscal Pact of 2013 had tried to facilitate the management of demand policies aimed to stabilize the economy of the EU. As can be seen from our results, even in the cases where the fiscal rules seem to be not advisable, an upward trend can be seen in the values of the fiscal deficit from the year 2015. In other words, the proposed fiscal rules behave better after the QE policy adoption. In addition, this result is more noticeable for the “growth promoting” rule. With due caution, this outcome would reveal the importance of a proper combination of fiscal and monetary policies. As well as that the adoption of a “growth promoting” fiscal rule would have favored growth more efficiently.
Government deficit (−)/surplus (+), 2000–2009, ψ = 1
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |
|---|---|---|---|---|---|---|---|---|---|---|
| EU27 | ||||||||||
| Def | −1.20 | −1.90 | −2.70 | −3.10 | −2.70 | −2.30 | −1.40 | −0.50 | −2.00 | −6.00 |
| FRd | 0.82 | 1.30 | 0.94 | 0.43 | 0.07 | 0.38 | 0.90 | 1.90 | 2.99 | 1.92 |
| FRs | 1.56 | 1.91 | 2.07 | 1.73 | 1.45 | 1.47 | 2.05 | 2.74 | 3.76 | 3.95 |
| FRg | 0.81 | 0.64 | 1.49 | 1.21 | 1.03 | 0.56 | 1.14 | 1.13 | 1.82 | 4.11 |
| CORE | ||||||||||
| Def | 0.74 | 0.18 | −1.44 | −2.48 | −2.06 | −2.00 | −0.38 | 0.42 | −0.16 | −4.22 |
| FRd | −0.19 | 1.35 | 1.39 | 0.06 | −0.93 | −0.67 | −0.58 | 0.91 | 1.79 | 0.78 |
| FRs | −0.77 | 1.07 | 1.89 | 0.94 | 0.22 | 0.05 | 0.28 | 1.18 | 1.80 | 1.59 |
| FRg | −1.84 | −0.11 | 1.70 | 1.19 | 0.97 | 0.10 | 0.58 | 0.41 | 0.45 | 2.28 |
| Euro19 | ||||||||||
| Def | −1.30 | −2.00 | −2.70 | −3.10 | −2.90 | −2.60 | −1.50 | −0.60 | −2.20 | −6.20 |
| FRd | −2.90 | −2.01 | −2.35 | −3.01 | −3.57 | −3.55 | −3.46 | −2.28 | −1.18 | −2.27 |
| FRs | −3.29 | −2.17 | −2.08 | −2.70 | −3.26 | −3.49 | −3.52 | −2.64 | −1.71 | −1.22 |
| FRg | −2.66 | −1.78 | −1.20 | −1.77 | −2.17 | −2.72 | −2.77 | −2.59 | −2.17 | 0.96 |
| GIIPS | ||||||||||
| Def | −1.20 | −2.60 | −2.60 | −3.36 | −3.46 | −2.72 | −1.76 | −1.74 | −5.62 | −11.06 |
| FRd | −3.83 | −2.71 | −3.60 | −3.20 | −3.65 | −3.99 | −3.57 | −2.56 | −2.33 | −6.03 |
| FRs | −4.71 | −3.32 | −3.50 | −2.80 | 13.01 | −3.76 | −3.34 | −2.65 | −2.34 | −4.49 |
| FRg | −4.31 | −3.01 | −2.31 | −1.41 | −1.42 | −2.76 | −2.03 | −2.02 | −1.77 | −1.01 |
Source: Own elaboration based on data taken from Eurostat.
Note: Def refers to government deficit (−) or surplus (+), as percentage of GDP, defined as the difference between the revenue and the expenditure of the general government sector. Moreover, FRd, FRs, and FRg stand for the deficit outcomes of the disciplined, symmetric, and growth promoting fiscal rules, respectively.
Government deficit (−)/surplus (+), 2010–2019, ψ = 1
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |
|---|---|---|---|---|---|---|---|---|---|---|
| EU27 | ||||||||||
| Def | −6.00 | −4.10 | −3.60 | −2.90 | −2.40 | −1.90 | −1.40 | −0.80 | −0.40 | −0.50 |
| FRd | −2.99 | −4.19 | −3.36 | −3.63 | −4.10 | −4.24 | −3.67 | −3.06 | −1.78 | −1.05 |
| FRs | 0.09 | −2.52 | −2.20 | −2.56 | −3.84 | −4.73 | −4.55 | −3.79 | −2.33 | −1.44 |
| FRg | 3.21 | −0.98 | −0.64 | −0.39 | −2.14 | −3.86 | −4.54 | −3.61 | −2.44 | −1.57 |
| CORE | ||||||||||
| Def | −4.18 | −2.82 | −2.54 | −1.84 | −1.44 | −1.14 | −0.58 | 0.06 | 0.64 | 0.14 |
| FRd | −3.96 | −4.66 | −3.48 | −3.70 | −3.63 | −3.62 | −3.15 | −2.48 | −1.34 | −0.40 |
| FRs | −2.50 | −4.34 | −3.15 | −3.24 | −3.82 | −4.36 | −3.94 | −3.32 | −1.91 | −0.86 |
| FRg | 0.15 | −3.21 | −1.82 | −1.16 | −2.41 | −3.66 | −3.50 | −3.07 | −1.64 | −0.77 |
| Euro19 | ||||||||||
| Def | −6.30 | −4.20 | −3.70 | −3.00 | −2.50 | −2.00 | −1.50 | −0.90 | −0.50 | −0.60 |
| FRd | −7.86 | −9.30 | −7.68 | −7.83 | −8.07 | −8.08 | −7.54 | −6.88 | −5.69 | −4.99 |
| FRs | −6.26 | −9.30 | −7.91 | −8.08 | −9.09 | −9.83 | −9.69 | −8.82 | −7.48 | −6.66 |
| FRg | −1.40 | −6.31 | −4.87 | −4.45 | −6.07 | −7.75 | −8.44 | −7.31 | −6.27 | −5.50 |
| GIIPS | ||||||||||
| Def | −13.70 | −8.86 | −7.38 | −6.88 | −4.70 | −3.98 | −1.76 | −1.60 | −0.78 | −0.48 |
| FRd | −13.54 | −17.87 | −16.70 | −16.89 | −18.38 | −16.99 | −15.41 | −13.43 | −12.56 | −11.85 |
| FRs | −11.83 | −16.71 | −17.00 | −17.88 | −20.79 | −20.73 | −19.64 | −17.29 | −16.35 | −15.77 |
| FRg | −5.92 | −10.20 | −9.76 | −10.35 | −14.11 | −15.92 | −16.65 | −13.33 | −12.99 | −12.52 |
Source: see Table 1A.
Note: see Table 1A.
Government deficit (−)/surplus (+), 2000–2009, ψ = 1
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |
|---|---|---|---|---|---|---|---|---|---|---|
| CEE | ||||||||||
| Def | −3.79 | −3.39 | −3.75 | −2.87 | −1.77 | −1.84 | −1.80 | −1.00 | −2.71 | −6.54 |
| FRd | 4.78 | 4.86 | 4.57 | 3.62 | 3.98 | 5.33 | 5.39 | 5.59 | 6.77 | 6.25 |
| FRs | 9.52 | 9.44 | 8.51 | 6.78 | 6.51 | 7.82 | 7.72 | 7.82 | 9.21 | 10.62 |
| FRg | 10.71 | 9.95 | 8.44 | 5.74 | 4.73 | 5.70 | 5.15 | 4.89 | 6.32 | 10.41 |
| CEEe | ||||||||||
| Def | −4.44 | −3.38 | −2.88 | −1.36 | −0.88 | −0.78 | −0.54 | −0.16 | −2.78 | −6.96 |
| FRd | 5.13 | 4.66 | 5.22 | 5.32 | 6.52 | 7.26 | 7.56 | 8.03 | 8.92 | 8.14 |
| FRs | 9.39 | 8.59 | 8.65 | 8.14 | 8.78 | 9.79 | 9.82 | 10.26 | 11.36 | 13.68 |
| FRg | 8.80 | 7.32 | 6.92 | 5.58 | 5.41 | 6.70 | 6.01 | 6.13 | 7.18 | 13.84 |
| CEEne | ||||||||||
| Def | −3.14 | −3.40 | −4.62 | −4.38 | −2.66 | −2.90 | −3.06 | −1.84 | −2.64 | −6.12 |
| FRd | 4.43 | 5.05 | 3.92 | 1.92 | 1.44 | 3.40 | 3.22 | 3.15 | 4.62 | 4.35 |
| FRs | 9.64 | 10.30 | 8.38 | 5.43 | 4.25 | 5.85 | 5.61 | 5.39 | 7.05 | 7.56 |
| FRg | 12.62 | 12.58 | 9.96 | 5.91 | 4.05 | 4.69 | 4.29 | 3.65 | 5.46 | 6.97 |
| Frugal | ||||||||||
| Def | 0.95 | 0.33 | −1.23 | −1.55 | −1.05 | 0.98 | 1.20 | 1.70 | 0.95 | −3.48 |
| FRd | 0.01 | 1.88 | 2.03 | 0.83 | 0.61 | 0.85 | 2.63 | 3.53 | 4.63 | 3.59 |
| FRs | −0.33 | 1.71 | 2.81 | 1.94 | 1.75 | 1.39 | 2.88 | 3.73 | 5.13 | 4.71 |
| FRg | −1.22 | 0.44 | 2.69 | 2.10 | 1.88 | 0.58 | 1.72 | 1.80 | 3.20 | 4.31 |
Source: see Table 1A.
Note: see Table 1A.
Government deficit (−)/surplus (+), 2010–2019, ψ = 1
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |
|---|---|---|---|---|---|---|---|---|---|---|
| CEE | ||||||||||
| Def | −5.44 | −4.31 | −2.72 | −3.18 | −2.52 | −1.46 | −1.05 | −0.59 | −0.33 | −0.61 |
| FRd | 1.09 | 0.44 | 1.25 | 1.98 | 0.79 | 0.56 | 1.33 | 1.76 | 3.00 | 3.77 |
| FRs | 6.39 | 3.51 | 3.86 | 4.39 | 2.66 | 1.57 | 1.86 | 2.37 | 3.90 | 4.91 |
| FRg | 9.36 | 3.76 | 3.52 | 4.49 | 2.44 | 0.50 | 0.13 | 0.77 | 2.10 | 3.11 |
| CEEe | ||||||||||
| Def | −5.68 | −4.56 | −2.64 | −4.22 | −2.02 | −1.42 | −0.90 | −0.40 | −0.20 | −0.22 |
| FRd | 1.85 | 0.80 | 1.89 | 2.56 | 0.38 | 1.16 | 1.52 | 2.17 | 3.37 | 4.02 |
| FRs | 8.14 | 3.85 | 4.66 | 4.92 | 2.65 | 2.18 | 2.20 | 2.93 | 4.44 | 5.21 |
| FRg | 11.92 | 3.47 | 3.77 | 4.45 | 2.58 | 1.04 | 0.60 | 1.37 | 2.81 | 3.36 |
| CEEne | ||||||||||
| Def | −5.20 | −4.06 | −2.80 | −2.14 | −3.02 | −1.50 | −1.20 | −0.78 | −0.46 | −1.00 |
| FRd | 0.33 | 0.09 | 0.61 | 1.41 | 1.19 | −0.04 | 1.13 | 1.35 | 2.63 | 3.51 |
| FRs | 4.64 | 3.18 | 3.05 | 3.86 | 2.68 | 0.95 | 1.52 | 1.81 | 3.36 | 4.62 |
| FRg | 6.81 | 4.06 | 3.28 | 4.53 | 2.30 | −0.04 | −0.34 | 0.17 | 1.38 | 2.86 |
| Frugal | ||||||||||
| Def | −3.08 | −2.33 | −2.65 | −1.88 | −1.33 | −1.05 | −0.10 | 0.93 | 0.78 | 1.68 |
| FRd | −1.03 | −1.25 | −0.66 | −0.99 | −0.77 | −1.00 | −0.50 | 0.65 | 2.25 | 2.75 |
| FRs | 1.24 | −0.31 | 0.34 | 0.39 | 0.06 | −0.84 | −0.47 | 0.62 | 2.36 | 3.16 |
| FRg | 3.34 | −0.25 | 0.66 | 1.51 | 0.62 | −0.84 | −0.96 | −0.21 | 1.26 | 2.01 |
Source: see Table 1A.
Note: see Table 1A.
Government deficit (−)/surplus (+), 2000–2009, ψ = 0
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |
|---|---|---|---|---|---|---|---|---|---|---|
| EU27 | ||||||||||
| Def | −1.20 | −1.90 | −2.70 | −3.10 | −2.70 | −2.30 | −1.40 | −0.50 | −2.00 | −6.00 |
| FRd | 0.52 | 0.82 | 0.39 | −0.10 | −0.43 | −0.12 | 0.35 | 1.35 | 2.42 | 0.99 |
| FRs | 0.96 | 0.96 | 0.97 | 0.68 | 0.45 | 0.47 | 0.95 | 1.64 | 2.61 | 2.10 |
| FRg | −0.09 | −0.79 | −0.16 | −0.36 | −0.47 | −0.94 | −0.51 | −0.52 | 0.09 | 1.33 |
| CORE | ||||||||||
| Def | 0.74 | 0.18 | −1.44 | −2.48 | −2.06 | −2.00 | −0.38 | 0.42 | −0.16 | −4.22 |
| FRd | −0.45 | 0.75 | 0.71 | −0.47 | −1.41 | −1.20 | −1.16 | 0.38 | 1.29 | −0.06 |
| FRs | −1.30 | −0.13 | 0.53 | −0.13 | −0.73 | −1.01 | −0.88 | 0.12 | 0.80 | −0.09 |
| FRg | −2.63 | −1.91 | −0.34 | −0.41 | −0.45 | −1.49 | −1.16 | −1.18 | −1.05 | −0.24 |
| Euro19 | ||||||||||
| Def | −1.30 | −2.00 | −2.70 | −3.10 | −2.90 | −2.60 | −1.50 | −0.60 | −2.20 | −6.20 |
| FRd | −3.49 | −2.95 | −3.19 | −3.72 | −4.26 | −4.22 | −4.12 | −2.99 | −1.89 | −3.49 |
| FRs | −4.47 | −4.05 | −3.77 | −4.12 | −4.65 | −4.83 | −4.84 | −4.06 | −3.13 | −3.65 |
| FRg | −4.43 | −4.60 | −3.74 | −3.91 | −4.25 | −4.74 | −4.75 | −4.71 | −4.30 | −2.68 |
| GIIPS | ||||||||||
| Def | −1.20 | −2.60 | −2.60 | −3.36 | −3.46 | −2.72 | −1.76 | −1.74 | −5.62 | −11.06 |
| FRd | −4.35 | −3.57 | −4.45 | −4.12 | −4.48 | −4.65 | −4.24 | −3.30 | −2.99 | −6.91 |
| FRs | −5.76 | −5.03 | −5.21 | −4.65 | −4.66 | −5.08 | −4.68 | −4.13 | −3.65 | −6.25 |
| FRg | −5.88 | −5.58 | −4.87 | −4.18 | −3.90 | −4.74 | −4.04 | −4.24 | −3.74 | −3.65 |
Source: see Table 1A.
Note: see Table 1A.
Government deficit (−)/surplus (+), 2010–2019, ψ = 0
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |
|---|---|---|---|---|---|---|---|---|---|---|
| EU27 | ||||||||||
| Def | −6.00 | −4.10 | −3.60 | −2.90 | −2.40 | −1.90 | −1.40 | −0.80 | −0.40 | −0.50 |
| FRd | −3.24 | −4.72 | −4.13 | −4.28 | −4.47 | −4.39 | −3.70 | −3.11 | −2.20 | −1.53 |
| FRs | −0.41 | −3.57 | −3.75 | −3.86 | −4.59 | −5.03 | −4.60 | −3.89 | −3.18 | −2.39 |
| FRg | 2.46 | −2.56 | −2.96 | −2.34 | −3.27 | −4.31 | −4.61 | −3.76 | −3.72 | −3.00 |
| CORE | ||||||||||
| Def | −4.18 | −2.82 | −2.54 | −1.84 | −1.44 | −1.14 | −0.58 | 0.06 | 0.64 | 0.14 |
| FRd | −4.02 | −5.10 | −4.20 | −4.34 | −4.03 | −3.77 | −3.23 | −2.61 | −1.77 | −0.89 |
| FRs | −2.63 | −5.22 | −4.59 | −4.51 | −4.63 | −4.65 | −4.11 | −3.58 | −2.76 | −1.86 |
| FRg | −0.04 | −4.53 | −3.98 | −3.07 | −3.62 | −4.10 | −3.75 | −3.46 | −2.92 | −2.25 |
| Euro19 | ||||||||||
| Def | −6.30 | −4.20 | −3.70 | −3.00 | −2.50 | −2.00 | −1.50 | −0.90 | −0.50 | −0.60 |
| FRd | −8.07 | −9.68 | −8.44 | −8.51 | −8.38 | −8.16 | −7.53 | −6.93 | −6.10 | −5.41 |
| FRs | −6.68 | −10.06 | −9.43 | −9.44 | −9.71 | −9.99 | −9.66 | −8.91 | −8.29 | −7.51 |
| FRg | −2.03 | −7.44 | −7.15 | −6.49 | −6.99 | −7.99 | −8.40 | −7.44 | −7.48 | −6.78 |
| GIIPS | ||||||||||
| Def | −13.70 | −8.86 | −7.38 | −6.88 | −4.70 | −3.98 | −1.76 | −1.60 | −0.78 | −0.48 |
| FRd | −13.50 | −18.28 | −17.39 | −17.46 | −18.52 | −16.92 | −15.36 | −13.43 | −12.87 | −12.13 |
| FRs | −11.76 | −17.52 | −18.38 | −19.02 | −21.06 | −20.60 | −19.53 | −17.29 | −16.98 | −16.33 |
| FRg | −5.81 | −11.42 | −11.83 | −12.06 | −14.52 | −15.72 | −16.49 | −13.33 | −13.93 | −13.36 |
Source: see Table 1A.
Note: see Table 1A.
Government deficit (−)/surplus (+), 2000–2009, ψ = 0
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |
|---|---|---|---|---|---|---|---|---|---|---|
| CEE | ||||||||||
| Def | −3.79 | −3.39 | −3.75 | −2.87 | −1.77 | −1.84 | −1.80 | −1.00 | −2.71 | −6.54 |
| FRd | 2.52 | 2.14 | 2.41 | 2.27 | 2.98 | 4.02 | 4.35 | 4.52 | 5.41 | 4.18 |
| FRs | 4.99 | 4.00 | 4.20 | 4.10 | 4.51 | 5.19 | 5.65 | 5.67 | 6.50 | 6.48 |
| FRg | 3.92 | 1.79 | 1.97 | 1.71 | 1.72 | 1.75 | 2.05 | 1.67 | 2.25 | 4.20 |
| CEEe | ||||||||||
| Def | −4.44 | −3.38 | −2.88 | −1.36 | −0.88 | −0.78 | −0.54 | −0.16 | −2.78 | −6.96 |
| FRd | 3.97 | 3.22 | 3.95 | 4.47 | 5.66 | 6.18 | 6.61 | 6.95 | 7.50 | 5.82 |
| FRs | 7.08 | 5.71 | 6.11 | 6.45 | 7.06 | 7.63 | 7.93 | 8.10 | 8.53 | 9.04 |
| FRg | 5.33 | 3.00 | 3.11 | 3.04 | 2.83 | 3.46 | 3.17 | 2.89 | 2.93 | 6.88 |
| CEEne | ||||||||||
| Def | −3.14 | −3.40 | −4.62 | −4.38 | −2.66 | −2.90 | −3.06 | −1.84 | −2.64 | −6.12 |
| FRd | 1.06 | 1.05 | 0.88 | 0.08 | 0.29 | 1.85 | 2.10 | 2.08 | 3.32 | 2.53 |
| FRs | 2.90 | 2.30 | 2.30 | 1.75 | 1.96 | 2.75 | 3.37 | 3.25 | 4.46 | 3.92 |
| FRg | 2.51 | 0.58 | 0.84 | 0.39 | 0.61 | 0.04 | 0.92 | 0.44 | 1.57 | 1.51 |
| Frugal | ||||||||||
| Def | 0.95 | 0.33 | −1.23 | −1.55 | −1.05 | 0.98 | 1.20 | 1.70 | 0.95 | −3.48 |
| FRd | −0.31 | 1.36 | 1.25 | 0.21 | 0.12 | 0.52 | 2.25 | 3.11 | 4.18 | 2.82 |
| FRs | −0.97 | 0.66 | 1.26 | 0.70 | 0.77 | 0.73 | 2.11 | 2.90 | 4.23 | 3.17 |
| FRg | −2.17 | −1.13 | 0.36 | 0.25 | 0.42 | −0.42 | 0.57 | 0.56 | 1.85 | 2.00 |
Source: see Table 1A.
Note: see Table 1A.
Government deficit (−)/surplus (+), 2010–2019, ψ = 0
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |
|---|---|---|---|---|---|---|---|---|---|---|
| CEE | ||||||||||
| Def | −5.44 | −4.31 | −2.72 | −3.18 | −2.52 | −1.46 | −1.05 | −0.59 | −0.33 | −0.61 |
| FRd | 0.44 | −0.13 | 0.28 | 1.11 | 0.40 | 0.51 | 1.41 | 1.78 | 2.45 | 3.12 |
| FRs | 5.09 | 2.36 | 1.92 | 2.64 | 1.90 | 1.47 | 2.02 | 2.40 | 2.80 | 3.63 |
| FRg | 7.41 | 2.03 | 0.61 | 1.87 | 1.29 | 0.35 | 0.38 | 0.82 | 0.44 | 1.18 |
| CEEe | ||||||||||
| Def | −5.68 | −4.56 | −2.64 | −4.22 | −2.02 | −1.42 | −0.90 | −0.40 | −0.20 | −0.22 |
| FRd | 1.38 | 0.53 | 0.91 | 1.75 | −0.01 | 1.08 | 1.60 | 2.12 | 2.70 | 3.37 |
| FRs | 7.20 | 3.30 | 2.70 | 3.30 | 1.87 | 2.01 | 2.35 | 2.84 | 3.11 | 3.92 |
| FRg | 10.51 | 2.65 | 0.83 | 2.02 | 1.41 | 0.79 | 0.83 | 1.23 | 0.81 | 1.42 |
| CEEne | ||||||||||
| Def | −5.20 | −4.06 | −2.80 | −2.14 | −3.02 | −1.50 | −1.20 | −0.78 | −0.46 | −1.00 |
| FRd | −0.51 | −0.79 | −0.36 | 0.48 | 0.82 | −0.06 | 1.22 | 1.43 | 2.20 | 2.87 |
| FRs | 2.97 | 1.42 | 1.13 | 1.99 | 1.93 | 0.92 | 1.70 | 1.97 | 2.49 | 3.34 |
| FRg | 4.31 | 1.42 | 0.40 | 1.73 | 1.18 | −0.09 | −0.07 | 0.41 | 0.08 | 0.94 |
| Frugal | ||||||||||
| Def | −3.08 | −2.33 | −2.65 | −1.88 | −1.33 | −1.05 | −0.10 | 0.93 | 0.78 | 1.68 |
| FRd | −1.30 | −1.67 | −1.29 | −1.54 | −1.12 | −1.15 | −0.62 | 0.52 | 1.84 | 2.35 |
| FRs | 0.71 | −1.14 | −0.94 | −0.69 | −0.64 | −1.14 | −0.71 | 0.34 | 1.54 | 2.36 |
| FRg | 2.53 | −1.50 | −1.26 | −0.12 | −0.43 | −1.29 | −1.32 | −0.62 | 0.04 | 0.81 |
Source: see Table 1A.
Note: see Table 1A.
Our mixed results are in accordance with the findings of Díaz-Roldán (2017) who obtain that in the EMU, the fiscal performance is linked to the initial values of the public debt level. Moreover, this limitation has as consequence that countries showing low debt figures should apply nonaustere fiscal policies, whereas countries with high debt figures should be austere. In other words, countries with low debt can increase the government deficit, whereas countries with higher levels of debt should reduce the government deficit.
In terms of our results, we have seen that the “best” fiscal rule is the “growth promoting” one, but only when the countries show debt levels below the 60%. On the contrary, for countries with debt levels above the 60%, the fiscal rule that behaves better is the “disciplined” or austere one, and the best result is obtained following the limit on the structural deficit of 0.5% of GDP, according to the SGP.
4 Concluding Remarks
The economic crises that have hit the economies internationally, since the 1990s, have had different repercussions in different countries. In Europe, the solutions that have been tried to be offered have been based on the SGP and the EU agreements. However, the results have still been mixed.
In this study, we have performed a simulation exercise to investigate whether the use of explicit fiscal rules has improved the macroeconomic performance in the economic framework of the EU, where the fall in income levels occurred very asymmetrically and the objectives established by the SPG have worked in practice as explicit fiscal rules. Those rules set limits on deficit, debt, and public spending. In the EU, fiscal policy management is thus conditioned by three constraints. In this study, we have analyzed a simpler fiscal rule linked to the economy and the debt of each country. However, additionally, we have let constraining the growth of government expenditures below the growth of inflation, which allows us to compare the rule with a single restriction (setting a debt target) with that one which also establishes a limit on public spending (the growth of inflation). This special design of the fiscal rule is a novelty in the European context, although the inflation constraint has been successfully implemented in other countries as, for example, Brazil.
When considering several sets among the European countries, our results are mixed. For the EU, as whole, and the CORE countries the proposed fiscal rules proved to be useful only before the Euro crisis. After 2011, the reinforced SGP limits on the structural deficit, related to the levels of debt, have worked better than our proposed rules. Looking at the GIIPS, none of the proposed rules are advisable, given those countries have exhibited high debt levels above 60%, along the analyzed period. On the contrary, for the CEE and the frugal countries, our proposed rules seem to be useful because they have contributed to reduce the public deficit or even turn the deficit into a surplus. Given the low levels of debt of this set of countries, the rules have contributed not only to fiscal consolidation but also to economic recovery.
For all the sets of countries, the “growth promoting” rule is the best one, when our proposed rules are advisable. The “growth promoting” rule would guarantee fiscal consolidation but allowing also for an economic growth trend aimed to the recovery. Moreover, any rule augmented with the inflation constraint contributes better to improve the net lending position of public accounts.
Summarizing our findings, we could say that the success of fiscal rules is linked to the peculiar economic framework of each country and mainly to the accumulated debt levels relative to the rate of GDP growth.
In any case, the management of public finances has nontrivial consequences in the economy. When it seemed that economies were beginning to recover from the effects of the 2008 financial crisis, at the end of 2019, the health crisis caused by the COVID-19 pandemic once again shook economies into an unprecedented economic crisis. Moreover, as addressed by Lago, Martínez-Vázquez, & Sacchi (2021), the fiscal and administrative framework of the countries have proved to be significant. For that reason, the fiscal policy has taken a prominent role, arguing its advantages over the limited potential shown by monetary policy in the management of the 2008 crisis. More precisely, in the European context, to face the COVID-19 crisis, have been taken policy measures to promote liquidity to avoid collapse of production, as well as consumption, trying to avoid reaching too high levels of poverty. Besides, the EU the fiscal rules have been suspended with the expected activation date for the end of 2022. The ultimate reason is to facilitate the unprecedented fiscal support needed to face the COVID-19 crisis, waiting for the Resilience and Recovery Facility program. In the meantime, the way of how restoring from 2023, the former fiscal rules are the subject of a new debate (Nielsen, 2021). In this sense, the simulation developed in this study indicates that the adoption of a more flexible fiscal rule, such as the growth-promoting one, would allow for a better fiscal adjustment for all countries, combined with less restriction to growth and recovery.
Acknowledgment
The authors would like to thank the editor and the reviewers for their useful comments and suggestions.
-
Conflict of interest: Authors states not conflict of interest.
References
Ahlborn, M., & Wortmann, M. (2017, February). Output gap similarities in Europe: detecting country groups. Center for European Governance and Economic Development Research, Discussion Papers, N. 305, February 2017. Germany: Georg-August Universität Göttingen.10.2139/ssrn.2918902Search in Google Scholar
Ardanaz, M., Cavallo, E., Izquierdo, A., & Puig, J. (2019). Growth-friendly fiscal rules? Protecting public investment from budget cuts through fiscal rule design. Inter-American Development Bank, Discussion Paper 698.10.18235/0001804Search in Google Scholar
Arestis, P. (2017). Monetary policy sisnce the global finance crisis. In P. Arestis & M. Sawyer (Eds.), Economic policy since the global financial crisis (pp. 1–40). London: Palgrave Macmillian.10.1007/978-3-319-60459-6_1Search in Google Scholar
Arestis, P., & Sawyer, M. (Eds.). (2017). Economic policy since the global financial crisis. London: Palgrave Macmillian.10.1007/978-3-319-60459-6Search in Google Scholar
Arestis, P., & Sawyer, M. (2005). What is wrong with the Euro area monetary model? In G. Fontana & R. Realfonzo (Eds.), The monetary theory of production (pp. 231–242). London: Palgrave Macmillan.10.1057/9780230523074_16Search in Google Scholar
Asatryan, Z., Castellón, C., & Stratmann, T. (2018). Balanced budget rules and fiscal outcomes: Evidence from historical constitutions. Journal of Public Economics, 167, 105–119.10.1016/j.jpubeco.2018.09.001Search in Google Scholar
Ballabriga, F., & Martinez-Mongay, C. (2003). Has EMU shifted monetary and fiscal policies? In M. Buti (Ed.), Monetary and fiscal policies in EMU: Interactions and coordination. Cambridge: Cambridge University Press.Search in Google Scholar
Blanchard, O., Leandro, A., & Zettelmeyer, J. (2021). Redesingning EU fiscal rules: From rules to standards. PIIE Working Paper 21-1.10.1093/epolic/eiab003Search in Google Scholar
Cuestas, J. C., & Ordóñez, J. (2018). Fiscal consolidation in Europe: Has it worked? Applied Economics Letters, 25, 1179–1182.10.1080/13504851.2017.1406650Search in Google Scholar
Debomy, D. (2020). Frugal member states vs. the EU: Not too much pleaseInstitut Jacques Delors, 2/11/2020. https://institutdelors.eu/en/publications/les-frugaux-et-lue-point-trop-nen-faut/. Accessed on March 10, 2021.Search in Google Scholar
De Grauwe, P. (2018). Economics of monetary union (12th ed.). Oxford: Oxford University Press.Search in Google Scholar
Díaz-Roldán, C. (2017). Fiscal performance in monetary unions: How much austerity should be allowed? Panoeconomicus, 64(1), 61–76.10.2298/PAN140730021DSearch in Google Scholar
Díaz-Roldán, C., Ferrari-Filho, F., & Da Silva-Bichara, J. (2019). The performance of fiscal policy under an inflation targeting regime: What can be learned by the Brazilian fiscal rules? Metroeconomica, 70(1), 98–118.10.1111/meca.12231Search in Google Scholar
Díaz-Roldán, C., & Monteagudo-Cuerva, C. (2018). Fiscal policy and International Trade: An application to the European countries in transition. Argumenta Oeconomica, 40(1), 53–80.10.15611/aoe.2018.1.03Search in Google Scholar
Dovis, A., & Kirpalani, R. (2020). Fiscal rules, bailouts, and reputation in federal governments. American Economic Review, 110(3), 860–888.10.3386/w23942Search in Google Scholar
Eggertsson, G. B., Ferrero, A., & Raffo, A. (2014). Can structural reforms help Europe? Journal of Monetary Economics, 61(c), 2–22.10.1016/j.jmoneco.2013.11.006Search in Google Scholar
Eliason, P., & Lutz, B. (2018). Can fiscal rules constrain the size of government? An analysis of the ‘crown jewel’ of tax and expenditure limitations. Journal of Public Economics, 166, 115–144.10.1016/j.jpubeco.2018.07.008Search in Google Scholar
Esteve, V., & Prats, M. A. (2015). The monetary policy of the European central bank during the international crisis. In Ileana Tache (Ed.), The European union and the challenges of the new global context (Chapter 6, pp. 133–176). United Kingdom: Cambridge Scholars Publishing.Search in Google Scholar
European Central Bank. (2013, Februrary). The importance and effectiveness of national fiscal frameworks in the EU. Monthly Bulletin, 73–88.Search in Google Scholar
Galí, J., & Monacelli, T. (2016). Understanding the gains from wage flexibility: tTe exchange rate connection. American Economic Review, 106(12), 3829–3868.10.3386/w22489Search in Google Scholar
Galí, J. (2013). Notes for a new guide to Keynes (I): Wages, aggregate demand, and employment. Journal of the European Economic Association, 11(5), 973–1003.10.3386/w18651Search in Google Scholar
Galli, E., & Grembi, V. (2013). Assessing types of fiscal rules, en European Commission (ed.), Fiscal relations across government levels in times of crisis. Making compatible fiscal decentralization and budgetary discipline. Economic Papers, 501, 171–183.Search in Google Scholar
Grembi, V., Nannicini, T., & Troiano, U. (2016), Do fiscal rules matter? American Economic Journal: Applied Economics, 8(3), 1–30.10.1257/app.20150076Search in Google Scholar
Hallac, M., & Yared, P. (2014). Fiscal rules and discretion under persistent shocks. Econometrica, 82(5), 1557–1614.10.3386/w18545Search in Google Scholar
Hallac, M., & Yared, P. (2018). Fiscal rules and discretion in a world economy. American Economic Review, 108(8), 2305–2334.10.3386/w21492Search in Google Scholar
Hallac, M., & Yared, P. (2019). Fiscal rules and discretion under limited enforcement. NBER working papers, 25463. National Bureau of Economic Research.10.3386/w25463Search in Google Scholar
Hallac, M., & Yared, P. (2022). Instrument-based versus target-based rules. The Review of Economic Studies, 89(1), 312–345.10.1093/restud/rdab027Search in Google Scholar
Krugman, P. (2014). Depression economics returns. The New York Times. http://www.goo.gl/vKliNu. Accessed on July 9, 2020.10.2307/20020239Search in Google Scholar
Lago, S., Martínez-Vázquez, J., & Sacchi, A. (2021). Country performance during the Covid-19 pandemic: Externalities, coordination, and the role of institutions. Economics of Governance. 10.1007/s10101-021-00263-w.Search in Google Scholar
Nielsen, E. (2021). The need for better fiscal rules in Europe. VoxEU.org, 29 October.Search in Google Scholar
Romer, C. (2012). Fiscal policy in the crisis: Lessons and policy implications. Los Angeles: University of California.Search in Google Scholar
Sawyer, M. (2015). Can prosperity return to the Economic and Monetary Union? Review of Keynesian Economics, 3(4), 457–470.10.4337/roke.2015.04.02Search in Google Scholar
© 2022 Carmen Díaz-Roldán et al., published by De Gruyter
This work is licensed under the Creative Commons Attribution 4.0 International License.
Articles in the same Issue
- Editorial
- Editorial
- Regular Articles
- Houses as Collateral and Household Debt Deleveraging in Korea
- Methods Used in Economic Research: An Empirical Study of Trends and Levels
- Money for the Issuer: Liability or Equity?
- Corruption Accusations and Bureaucratic Performance: Evidence from Pakistan
- Subsidising Formal Childcare Versus Grandmothers' Time: Which Policy is More Effective?
- The Impact of Foreign Direct Investments on Poverty Reduction in the Western Balkans
- New Issues in International Economics
- Structural Breaks and Explosive Behavior in the Long-Run: The Case of Australian Real House Prices, 1870–2020
- Measuring the Cost of Covid-19 in Terms of the Rise in the Unemployment Rate: The Case of Spain
- Digital Gender Divide and Convergence in the European Union Countries
- Disentangling Permanent and Transitory Monetary Shocks with a Nonlinear Taylor Rule
- The Export Strategy and SMEs Employment Resilience During Slump Periods
- Corruption and International Trade: A Re-assessment with Intra-National Flows
- Fiscal Rules in Economic Crisis: The Trade-off Between Consolidation and Recovery, from a European Perspective
Articles in the same Issue
- Editorial
- Editorial
- Regular Articles
- Houses as Collateral and Household Debt Deleveraging in Korea
- Methods Used in Economic Research: An Empirical Study of Trends and Levels
- Money for the Issuer: Liability or Equity?
- Corruption Accusations and Bureaucratic Performance: Evidence from Pakistan
- Subsidising Formal Childcare Versus Grandmothers' Time: Which Policy is More Effective?
- The Impact of Foreign Direct Investments on Poverty Reduction in the Western Balkans
- New Issues in International Economics
- Structural Breaks and Explosive Behavior in the Long-Run: The Case of Australian Real House Prices, 1870–2020
- Measuring the Cost of Covid-19 in Terms of the Rise in the Unemployment Rate: The Case of Spain
- Digital Gender Divide and Convergence in the European Union Countries
- Disentangling Permanent and Transitory Monetary Shocks with a Nonlinear Taylor Rule
- The Export Strategy and SMEs Employment Resilience During Slump Periods
- Corruption and International Trade: A Re-assessment with Intra-National Flows
- Fiscal Rules in Economic Crisis: The Trade-off Between Consolidation and Recovery, from a European Perspective
