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Fiscal Policy and Fiscal Rules in the European Union

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  • Vito Tanzi

Abstract

This paper discusses the theory and practice of counter-cyclical fiscal policy to draw conclusions relevant for the fiscal architecture of the European Union. It starts by reviewing major lines of criticism on counter-cyclical fiscal policy, such as the existence of various lags, versions of Ricardian equivalence, non-Keynesian effects of fiscal policies and public choice considerations leading to asymmetry in the use of fiscal instruments. The paper then focuses on factors hampering implementation of a counter-cyclical fiscal policy. First, estimates of counterfactual variables – current and future – that are needed for running the policy are subject to significant margins of uncertainty. Second, relationships between national income on the one side and public revenues and spending on the other side tend to be unstable. Third, precise and timely measures of fiscal positions are largely non-existent. Finally, political requirements for an effective counter-cyclical policy are not met. The pre-Maastricht experience of EU countries, with a massive buildup of public debt despite fiscal-friendly environment, suggests a need for fiscal rules to avoid Argentina-like debt crises. Diverging initial positions of countries call for flexible approach as to the time needed to conform but not for relaxation of the rules, as it recently happened to the Stability and Growth Pact.

Suggested Citation

  • Vito Tanzi, 2005. "Fiscal Policy and Fiscal Rules in the European Union," CASE Network Studies and Analyses 0301, CASE-Center for Social and Economic Research.
  • Handle: RePEc:sec:cnstan:0301
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    References listed on IDEAS

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    Cited by:

    1. Kocenda, Evzen & Kutan, Ali M. & Yigit, Taner M., 2008. "Fiscal convergence in the European Union," The North American Journal of Economics and Finance, Elsevier, vol. 19(3), pages 319-330, December.
    2. Malley, Jim & Philippopoulos, Apostolis & Woitek, Ulrich, 2009. "To react or not? Technology shocks, fiscal policy and welfare in the EU-3," European Economic Review, Elsevier, vol. 53(6), pages 689-714, August.
    3. Martina Yakova, 2019. "Tax buoyancy of the EU-28 countries – a comparative analysis," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 59-73.
    4. Gorčák Martin & Šaroch Stanislav, 2021. "Impact of fiscal institutions on public finances in the European Union: Review of evidence in the empirical literature," Review of Economic Perspectives, Sciendo, vol. 21(2), pages 215-232, June.
    5. Dabrowski, Marek & Radziwill, Artur, 2007. "Regional vs. Global Public Goods: The Case of Post-Communist Transition," MPRA Paper 11967, University Library of Munich, Germany.
    6. Kocenda, Evzen & Kutan, Ali M. & Yigit, Taner M., 2006. "Pilgrims to the Eurozone: How far, how fast?," Economic Systems, Elsevier, vol. 30(4), pages 311-327, December.
    7. Jim Malley & Apostolis Philippopoulos & Ulrich Woitek, 2007. "To React or Not? Fiscal Policy, Volatility and Welfare in the EU-3," IEW - Working Papers 312, Institute for Empirical Research in Economics - University of Zurich.
    8. Jolanta Galuszka, 2013. "The Fiscal Union As A Remedy For The Economic And Financial Crisis In The European Union," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 8(1), pages 49-67, March.
    9. Vito Tanzi, 2006. "Fiscal Policy: When Theory Collides with Reality," IDB Publications (Working Papers) 9110, Inter-American Development Bank.
    10. Marek Lubiński, 2011. "Przyszłość paktu stabilności i wzrostu," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1-2, pages 19-42.

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