Fiscal Rules and Stabilisers in Europe

Fiscal and monetary policies in Europe have been designed to ensure that a stability oriented framework is in place, but they have not always been successful in this end. In this paper we assess the fiscal rules in Europe in this context using NiGEM and other tools. We first look at fiscal developments and their impacts since 1997 in the four largest European Union countries. We then look in particular at the timing and nature of fiscal changes, and at the multiplier impacts of changes in taxes and in spending in these countries. We discuss why these multipliers differ between countries, and look in particular at the role of consumption behaviour and differing liquidity constraints in determining their size. We also argue that spending increases have more impacts than tax cuts. Hence, we conclude that the evolution of demand and budget deficits has varied between these countries both because of the composition of budget changes and their impacts. This analysis allows us to evaluate the automatic stabilizers in Europe, and we argue that these are small. We also look at the cyclical adjustment of deficits using estimates of trend output. These results impact on the final discussion of alternative fiscal rules for Europe