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Macroeconomic Effects of Fiscal Consolidation Policy in the EU

Author

Listed:
  • Markus Marterbauer

    (WIFO)

  • Ewald Walterskirchen

    (WIFO)

Abstract

Between 1995 and 1997, the member states of the European Union succeeded in reducing their government deficits from an average of 5 to 2½ percent of GDP. Economic growth remained sluggish throughout the period, but the recession expected by many as a consequence of restrictive fiscal policies did not occur. This is due to a number of reasons: the favourable development of the world economy constituted the most important factor of growth during the phase of fiscal consolidation. Some countries, which were pursuing particularly restrictive policies, devalued their currencies by a significant margin and were thus able to compensate declining domestic demand through rising exports. Given the substantial drop of the saving ratio, the reduction of household disposable income did not result in a corresponding decline of consumption. The lowering of interest rates in the period of transition to European Monetary Union considerably eased the burden of interest payments on government debt for a number of countries. One-off effects and outsourcing measures also contributed substantially to the process of fiscal consolidation in the EU.

Suggested Citation

  • Markus Marterbauer & Ewald Walterskirchen, 1999. "Macroeconomic Effects of Fiscal Consolidation Policy in the EU," Austrian Economic Quarterly, WIFO, vol. 4(2), pages 105-114, April.
    • Handle: RePEc:wfo:wquart:y:1999:i:2:p:105-114
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    References listed on IDEAS

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