Received Wisdom and Beyond: Lessons from Fiscal Consolidation in the EU

31 Pages Posted: 14 Oct 2008 Last revised: 1 Aug 2011

See all articles by Martin Larch

Martin Larch

European Fiscal Board

Alessandro Turrini

European Commission; Centre for Economic Policy Research (CEPR)

Date Written: April 1, 2008

Abstract

The paper examines consolidation episodes in the EU since 1970 with a view to shedding light on the factors that determine the success or failure of fiscal adjustment. Compared to the existing literature on successful fiscal consolidations we add a number of new dimensions. Three deserve particular attention. Firstly, we explore a broader set of potential ingredients of the recipe for success. In addition to the composition of adjustment, which has extensively been examined in the literature, we consider further elements such as the quality and strength of fiscal governance and the implementation of structural reforms. Secondly, our analysis seeks to differentiate between at least two different types of consolidation episodes, one in which a relatively big fiscal correction is implemented in a short period of time, dubbed 'cold shower' consolidation, as compared to more gradual episodes of adjustment. Thirdly, we check whether the 'recipe for success' changed over time. Our analysis broadly confirms the results established in the literature for what concerns (i) the conditions triggering a consolidation episode and (ii) the composition of adjustment, with minor but important qualifications related to the role played by government wages. In addition it provides evidence that well-designed fiscal governance as well as structural reforms improve the odds of both starting a consolidation episode and achieving a lasting fiscal correction. Our analysis also shows that the composition of successful and unsuccessful consolidation has become more similar over time and that other discriminating factors such as fiscal governance and structural reforms turn out to make an increasing difference for success.

Keywords: Fiscal consolidations, fiscal rules, budgetary procedures, structural reforms

JEL Classification: E63, H30, H63

Suggested Citation

Larch, Martin and Turrini, Alessandro, Received Wisdom and Beyond: Lessons from Fiscal Consolidation in the EU (April 1, 2008). Available at SSRN: https://ssrn.com/abstract=1284378 or http://dx.doi.org/10.2139/ssrn.1284378

Martin Larch (Contact Author)

European Fiscal Board ( email )

Belgium
0032 2 2969244 (Phone)

Alessandro Turrini

European Commission ( email )

Office BU-10/113
B-1049 Brussels
Belgium
+32 2 299 5072 (Phone)
+32 2 299 3505 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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