Fiscal Adjustment in Southern Europe: the Limits of EMU Conditionality

The EMU fiscal adjustment paths of the four Southern Europe members (Italy, Spain, Greece, and Portugal – SE-4) vary along two dimensions: a) cross-temporal (pre- and post-EMU accession) and b) cross-country. We account for the cross-temporal variation by distinguishing between the ‘hard’ and ‘softer’ EMU conditionality of the pre- and post-accession stage. External constraints in the form of the Maastricht eligibility criteria constituted a significant common ‘push’ factor in the fiscal stabilization process of EMU candidate countries throughout the 1990s. However, their potent does not necessarily lead to fiscal sustainability as demonstrated by the postaccession budgetary outlook of the SE-4. We account for the crosscountry variation by introducing additional ‘pull’ factors related to the reform content, context and capability (such as unemployment, the level of social concertation, and government effectiveness). Only in cases where such factors were at work did governments engage in structural reforms to consolidate public finances instead of the less controversial path of macroeconomic policy reform.