The impact of austerity policies in the Eurozone: fiscal multipliers and ‘adjustment fatigue’

Abstract

This article seeks to compare the significance of the links between fiscal policies and economic growth in the Eurozone before and after the imposition of adjustments on the countries bailed out, in an effort to estimate the scale of fiscal multipliers and to evaluate pro-cyclical or counter-cyclical orientation of the measures. The results of the regression serve to bear out the theoretical forecasts of those authors who warned of high fiscal multipliers in a context of recession, also characterized by a credit crunch, massive deleveraging in the private sector and near-zero interest rates.

Keywords:

• European economic governance
• impact of austerity policies
• adjustment fatigue

JEL Classification:

• E62
• F15
• H62

Acknowledgement

We thank Econometric research group (IT-642-13) and CAIMPO RESEARCH (UFI11/10) for their help.

Notes

¹ Given those countries that were bailed out after 2010 received urgent letters from the ECB or recommendations from ECOFIN calling on them to make substantial cuts in public spending or raise certain taxes.

² The actual budget balance net of the cyclical component and one-off and other temporary measures: this gives a measure of the underlying trend in the budget balance.

³ They were all the Eurozone countries at the time of the bail-outs with the exception of Cyprus, where specific circumstances (a hyper developed financial system with a majority presence of capital of Russian origin) left the country facing extreme volatility. Cyprus did not sign up to the adjustment plans until 2013.