Blog Post

Chart of the week: the fiscal stance in the euro area

The size of the deficit reduction mandated by European fiscal rules for euro area countries currently under excessive deficit procedure will be on average nearly 1.5 percent of GDP per year in the next two years. While such adjustment would not be overly restrictive in normal times, it is undesirable in countries that are already in recession. The risk is particularly important in Cyprus and Spain which need to undertake cumulated fiscal adjustments of more than 6 percentage points of GDP in 2012 and 2013 in order to satisfy European fiscal rules.

By: and Date: June 25, 2012 Topic: Macroeconomic policy

The size of the deficit reduction mandated by European fiscal rules for euro area countries currently under excessive deficit procedure will be on average nearly 1.5 percent of GDP per year in the next two years. While such adjustment would not be overly restrictive in normal times, it is undesirable in countries that are already in recession. The risk is particularly important in Cyprus and Spain which need to undertake cumulated fiscal adjustments of more than 6 percentage points of GDP in 2012 and 2013 in order to satisfy European fiscal rules.

Graph 1: The cumulated size of deficit reduction over 2012-2013, % of GDP

Source: Authors’ own elaboration based on National Stability Programmes and Commission’s Spring Economic Forecast, May 2012.

 

There is much talk about fiscal austerity in the euro zone and concern is expressed about the fact that significant deficit reduction may produce large drops in output, which is undesirable in bad times. What is the exact size of deficit reduction over the next two years?

We calculated the size of deficit reduction in all the countries that are at present under excessive deficit procedure and need to correct excessive nominal deficits either by 2012 (Cyprus and Belgium) or by 2013 (all others, excluding Estonia, Finland, Luxembourg and the three programme countries Greece, Ireland and Portugal, which have their own timetable).

We distinguish between corrective measures that have already been envisaged in the national Stability Programmes of April 2012, which we classify as “planned”, and the extraordinary measures that are not planned but deemed necessary to obey by the agreed deadlines for correction; these are classified as “extra” and are calculated as the distance of the deficit level forecasted by the Commission from the 3%-of-GDP level in the target year. As the Commission’s forecast for 2013 does not include the fiscal policy measures that will be implemented in 2013, we assume quite optimistically that national fiscal plans perfectly anticipate fiscal policy outputs in 2013.

Over 2012-2013, the average cumulated planned fiscal contraction is 2.75 percent of GDP, thus an annual cut of 1.4 percent, which is certainly not desirable in bad times but it is not dramatic either. The average cumulated fiscal contraction (including both planned and extraordinary interventions) reaches 3 percent of GDP over the two years, leaving the annual adjustment effort at 1.5 percent of GDP.

What is but striking is the large cross-country variation with a very restrictive fiscal stance especially in Spain and Cyprus, as both should go through a cumulated deficit reduction in 2012 and 2013 that is above 6 percent of GDP.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Opinion

European governance

Can EU fiscal rules jump on the green bandwagon?

By and large, setting a new green golden rule would be a useful addition to the existing EU fiscal framework.

By: Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: October 22, 2021
Read about event More on this topic
 

Upcoming Event

Nov
4
14:00

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Petra Geraats, Wolfgang Lemke and Francesco Papadia Topic: Macroeconomic policy
Read article
 

Blog Post

European governance

Germany’s post-pandemic current account surplus

The pandemic has increased the net lending position of the German corporate sector. By incentivising private investment, policymakers could trigger a virtuous cycle of increasing wages, decreasing corporate net lending, which would eventually lead to a reduction of the economy-wide current account surplus.

By: Lionel Guetta-Jeanrenaud and Guntram B. Wolff Topic: European governance, Macroeconomic policy Date: October 21, 2021
Read about event More on this topic
 

Upcoming Event

Nov
9
11:00

Phasing out COVID-19 emergency support programmes: effects on productivity and financial stability

How can European countries phase out the COVID-19 support measures without having a negative impact on productivity and financial stability?

Speakers: Maria Demertzis and Laurie Mayers Topic: Macroeconomic policy
Read about event
 

Past Event

Past Event

Monetary policy in the time of climate change

How does climate change influence monetary policy in the eurozone? What potential monetary policy measures should be taken up to address climate risks?

Speakers: Cornelia Holthausen, Jean Pisani-Ferry and Guntram B. Wolff Topic: Green economy, Macroeconomic policy Date: October 20, 2021
Read article More by this author
 

Podcast

Podcast

Rethinking fiscal policy

A look at the past, present and future of fiscal policy in the European Union with Chief economist of the European Stability Mechanism, Rolf Strauch.

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: October 20, 2021
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More by this author
 

Podcast

Podcast

A green fiscal pact

How can the European Union increase green public investment while consolidating budget deficits?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: September 29, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

Opinion

The pandemic’s uncertain impact on productivity

The pandemic has certainly permanently affected our way of working. Whether this is for the better remains to be seen.

By: Maria Demertzis Topic: Macroeconomic policy Date: September 28, 2021
Load more posts