Austerity, Cyclical Adjustment and How to use the Remaining Leeway for Expansionary Fiscal Policies Within the Current EU Fiscal Framework

Achim TRUGER, Michael NAGEL

Abstract


Abstract. Fiscal policy in the Euro area has been dominated by austerity measures implemented under the institutional setting of the 'reformed' stability and growth pact, and the even stricter 'fiscal compact' for some years. Since mid-2014 calls for a more expansionary fiscal policy to overcome the economic crisis have become more frequent.  The EU-Commission in this spirit has launched the Juncker-Plan to stimulate (public) investment and is using a less strict interpretation of the Stability and Growth Pact in order to provide more fiscal leeway for countries under unfavourable economic circumstances. This paper argues that these steps do not go far enough and that indeed a truly expansionary fiscal policy in the dimension of two to three per cent of Euro area GDP for a few years is possible even within the existing institutional framework. Special emphasis is put on the method of cyclical adjustment employed by the European Commission in order to assess member states’ fiscal position and effort as well as on ways to increase public investment. It is demonstrated that even in the existing framework the leeway for a macroeconomically and socially more sensible fiscal policy using the interpretational leeway inherent in the rules could be quite substantial.

Keywords. Fiscal policy, Austerity, Cyclical adjustment of public finances, Euro area.

JEL. E61, E62, E65, H62, H63.


Keywords


Fiscal policy; Austerity; Cyclical adjustment of public finances; Euro area

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DOI: http://dx.doi.org/10.1453/ter.v3i2.855

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