Skip to main content
Log in

The European debt crisis and fiscal reactions in Europe 2000–2014

  • Original Paper
  • Published:
International Economics and Economic Policy Aims and scope Submit manuscript

Abstract

After the outbreak of the global financial crisis, some governments in the EU experienced serious fiscal problems, while others were less affected. This paper seeks to shed light on the divergent fiscal performance in the EU countries before and after the outbreak of the crisis. Fiscal reaction functions of the primary balance are estimated for different groups of EU countries using quarterly data for the pre-crisis period 2001–2008 and for the crisis period 2009–2014. The pre-crisis estimations reveal some differences in persistence and cyclical reaction between different groups of countries, but in most cases little feedback from the debt stock to the primary balance. The fiscal reaction functions of the countries that eventually developed fiscal problems do not stand out. The estimations on data from the crisis period show largely unchanged persistence and counter-cyclicality but much more feedback from the debt stock, and this applies both to the crisis countries and those less affected. In spite of large deficits and accumulation of debt, the underlying fiscal reaction has become more prudent after the outbreak of the European debt crisis.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. A semi-elasticity of e.g. 0.6 implies that an increase in the output gap of 1 % corresponds to an improvement of the fiscal balance by 0.6 percentage points of GDP. Notice that the semi-elasticities used by the European Commission to compute the cyclically adjusted balance are not directly comparable to sensitivity estimates from estimation of fiscal reaction functions, in part because the latter takes into account the persistence of the fiscal stance.

  2. All data were downloaded on 1 August 2014 from the Eurostat database (http://epp.eurostat.ec.europa.eu/ portal/page/portal/statistics/search_database). The dataset is available from the authors upon request.

  3. Extraordinary expenses or revenue items appear particularly large when expressed in percent of quarterly GDP.

  4. The test statistic of the Im, Pesaran and Shin test is the average of bias-adjusted t-statistics from country-specific Augmented Dickey Fuller (ADF) tests, while the test statistics of the Fisher χ 2 tests are combinations of p-values from country-specific ADF or Phillips-Perron tests.

  5. The four quarters 2000:1–2000:4 are used for lags of the explanatory variables.

  6. The main difference is that the estimated cyclical dependence for the EAcris5 group which is lower when the output gap is used than when the growth rate G4Y is used, but this is arguably the result of the output gap being computed using forward-looking data.

  7. Another means of studying the prudence or “sustainability” of fiscal policy is to test for stationarity of the debt or the fiscal balance. Cuestas et al. (2014) examine whether the global financial crisis has changed the debt dynamics in 12 euro area countries and finds that this is indeed the case except in Germany and France, the two core countries of the euro area. Cuestas and Staehr (2013) find that the fiscal balance may be stationary in most EU countries from Central and Eastern Europe, but it is characterised by numerous structural breaks.

  8. In the annual model of Bohn (1998), an increase in the debt stock of 1 percentage point would, ceteris paribus, increase the primary balance by 0.042 percentage points the following year. In our quarterly model a similar increase of the debt stock would increase the primary balance by 0.054/4 = 0.014 percentage points the following quarter.

  9. When the equation is estimated with country-specific coefficients of DEBT(−4), the point estimates of the coefficient are 0.102, 0.261 and 0.239 and the latter two coefficients attain statistical significance at the 10 % level or better.

References

  • Afonso A, Agnello L, Furceri D (2010) Fiscal policy responsiveness, persistence, and discretion. Public Choice 145(3):503–530

    Article  Google Scholar 

  • Baldi G, Staehr K (2013) The European debt crisis and fiscal reaction functions in Europe 1999–2012. DIW Discussion Papers, no. 1295

  • Ballabriga F, Martinez-Mongay C (2003) Has EMU shifted monetary and fiscal policies. In: Buti M (ed) Monetary and fiscal policies in EMU. Interactions and Coordination. Cambridge University Press, Cambridge, pp 246–272

    Google Scholar 

  • Bernoth K, Hallet AH, Lewis J (2008) Did fiscal policy makers know what they were doing? Reassessing fiscal policy with real-time data. DNB Working Papers, no. 169, Netherlands Central Bank

  • Bohn H (1998) The behavior of U.S. public debt and deficits. Q J Econ 113(3):949–963

    Article  Google Scholar 

  • Boussard J, de Castro F, Salto M. (2012) Fiscal multipliers and public debt dynamics in consolidations. European Economy. Economic Papers, no. 460

  • Burger P, Marinkov M (2012) Fiscal rules and regime-dependent fiscal reaction functions: the South African case. OECD J Budg 12(1):1–29

    Article  Google Scholar 

  • Celasun O, Kang JS (2006) On the properties of various estimators for fiscal reaction functions. IMF Working Paper, no. WP/06/182, International Monetary Fund

  • Cuestas JC, Staehr K (2013) Fiscal shocks and budget balance persistence in the EU countries from Central and Eastern Europe. Appl Econ 45(22):3211–3219

    Article  Google Scholar 

  • Cuestas JC, Gil-Alana LA, Staehr K (2014) Government debt dynamics and the global financial crisis: has anything changed in the EA12? Econ Lett 124(1):64–66

    Article  Google Scholar 

  • Darvas Z (2010) The impact of the crisis on budget policy in Central and Eastern Europe. OECD J Budg 10(1):1–42

    Article  Google Scholar 

  • de Mello L (2008) Estimating a fiscal reaction function: the case of debt sustainability in Brazil. Appl Econ 40(3):271–284

    Article  Google Scholar 

  • Egert B (2010) Counter-cyclical economic policy. OECD Economics Department Working Papers, no. 763, Organisation for Economic Co-operation and Development

  • European Commission (2013) Public finances in EMU – 2013. European Economy, no. 4/2013

  • Fatas A, Mihov I (2001) Fiscal policy and business cycles: an empirical investigation. http://faculty.insead.edu/fatas/myc.pdf. (Published in Spanish in Moneda y Credito, vol. 118.)

  • Fatas A, Mihov I (2008) Fiscal discipline, volatility and growth. In: Irwin T, Perry G, Serven L, Suescun R (eds) On prudence or abstinence: fiscal policy. Stabilization and Growth, World Bank

    Google Scholar 

  • Friedman B (2006) Deficits and debt in the short and long run. In: Kopcke R, Tootell G, Triest R (eds) The macroeconomics of fiscal policy. MIT Press, Cambridge

    Google Scholar 

  • Gali J, Perotti R (2003) Fiscal policy and monetary integration in Europe. Econ Policy 18(37):533–572

    Article  Google Scholar 

  • Ilzetzki E, Vegh CA (2008) Procyclical fiscal policy in developing countries: truth or fiction?. NBER Working Paper, no. 14191, National Bureau of Economic Research

  • in’ t Veld J, Larch M, Vandeweyer M (2012) Automatic fiscal stabilisers: what they are and what they do. European Economy – Economic Papers, no. 452

  • Lane PR (2012) The European sovereign debt crisis. J Econ Perspect 26(3):49–68

    Article  Google Scholar 

  • Marinheiro CF (2005) Has the stability and growth pact stabilised? Evidence from a panel of 12 European countries and some implications for the reform of the Pact. CESifo Working Paper Series, no. 1411, CESifo Group Munich

  • Paloviita M (2012) Real time uncertainty in fiscal planning and debt accumulation in the euro area. Bank of Finland Research, Discussion Papers, no. 34/2012

  • Piergallini A, Postigliola M (2012) Fiscal policy and public debt dynamics in Italy, 1861–2009. CEIS Research Paper, no. 248, Tor Vergata University, CEIS

  • Reicher CP (2012) An estimated fiscal Taylor Rule for the postwar United States. Econ Lett 114(3):319–321

    Article  Google Scholar 

  • Shambaugh JC, Reis R, Rey H (2012) The euro’s three crises. Brookings Papers on Economic Activity, spring, pp. 157–211

  • Staehr K (2008) Fiscal policies and business cycles in an enlarged euro area. Econ Syst 32(1):46–69

    Article  Google Scholar 

  • Sutherland D, Hoeller P, Egert B, Rohn O (2010) Counter-cyclical economic policy. OECD Economics Department, Working Paper, no. 760

  • Wyplosz C (2006) European Monetary Union: the dark sides of a major success. Econ Policy 21(46):207–261

    Article  Google Scholar 

Download references

Acknowledgments

The authors would like to thank, without implicating, two anonymous referees of IEEP, Davide Furceri, Dmitry Kulikov, Jaanika Meriküll and Lenno Uusküla as well as participants in the NBS conference “Fiscal policy and coordination in Europe” and an Eesti Pank seminar for their useful comments. Staehr acknowledges support from Estonian Base Financing grant no. B617A and Estonian Target Financing grant no. SF0140059s12. The views expressed are those of the authors and not necessarily those of Eesti Pank.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Karsten Staehr.

Appendix A: OLS estimations

Appendix A: OLS estimations

Table 6 Fiscal reaction to business cycle, OLS estimation, 2001:1–2008:2

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Baldi, G., Staehr, K. The European debt crisis and fiscal reactions in Europe 2000–2014. Int Econ Econ Policy 13, 297–317 (2016). https://doi.org/10.1007/s10368-014-0309-4

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10368-014-0309-4

Keywords

JEL Classification

Navigation