The Euro and the Crisis: Evidence on Recent Fiscal Multipliers

Only several years after Euro banknotes and coins were put into circulation, the 1 Eurozone was struck by the global financial and economic crisis. Originated from the US, the crisis progressively gained in intensity when reaching the Eurozone, nourished by a wide variety of factors such as major fiscal worsening caused by extreme increases in public spending (for example, wages and pensions, as in Greece or Portugal), property bubbles weakening the financial sector (Spain), loss of confidence due to false public statements on the condition of fiscal accounts (Greece) generating skyjumping spreads and snow-ball effects on debt dynamics, etc. In a context of financial contagion, these imbalances coagulated into a Eurozone crisis, of such a magnitude to the point of being a major threatening for the perenity of the Eurozone itself. At a global level, the economic importance of the Eurozone and the negative spillovers to integrated markets arising from its potential disappearance urged major institutions, including the IMF, the World Bank, the EIB or the EBRD, to join effort with EU- (such as the European Financial Stability Mechanism) or Eurozone-based (such as the European Financial Stability Facility) mechanisms in providing massive bailout for many Eurozone countries. At a national level, the crisis was associated to changes in the political colour of governments in many Eurozone countries (for example, Greece, Italy, Portugal or Spain). But more importantly, many governments adopted national-level massive fiscal stimuli, in addition to European-level fiscal stimuli, such as the European Economic Recovery Plan, estimated to around 2 % of the EU GDP cumulated for the 2009- 2010 period. However, since 2011, given the deterioration of their public finances, many European countries adopted large fiscal consolidation plans.