Performance of the fiscal rules.
Fiscal rules during times of recession.
The double dip recession.
When taking into account the fiscal impulse of the Euro area during the period of 2008-2010 it can be seen that the fiscal stimulus was sizeable. According to the data reported by the EU Commission the fiscal impulse during the three years considered amounted a 6.3% of the GDP. When taking into consideration the components of the fiscal impulse, it can be seen that the fiscal response was mainly articulated by the use of discretionary measures and the use of automatic stabilisers (representing around a 0.52% and a 0.42% of the fiscal impulse respectively). From a fiscal perspective, the results of the overall fiscal impulse lead to large increases in the government expenditure-to-GDP ratios as well as the deterioration of structural balances and the increase of debt-to-GDP ratios (Afonso et al., 2010). Around the year 2010, the sudden reaction of financial markets to the increased levels of debt in the periphery and the publication of the real data in regard to Greek deficits, influenced the fiscal stance of the Euro zone. In order to restore confidence around the peripheric countries and, in a more general way, around the euro as a whole, European policy makers decided to reduce fiscal imbalances. At that time, in light of the expectations about the evolution of public debt, the estimations of fiscal multipliers and the previous episodes of expansionary fiscal consolidation, fiscal moderation was seen as the best way to address the debt overhang and the sustainability concerns.
According to the EU Commission the fiscal impulse during the period was around -3.2% of the EMU’s GDP. According to (Baldwin & Giavazzi, 2015), the exercise of fiscal consolidation, if required for some members, affected to all the eurozone countries. The tightening of fiscal policy in the GIIPS amounted for the 48% while the one taking place in Germany and France accounted for the 32% and 13% respectively. Despite the expectations around the positive effects of the fiscal consolidation in the eurozone, it is argued that the simultaneous consolidation initiated in 2011 exacerbated the economic slowdown and contributed to the European double dip recession. In a general way, as shown by (Fatás & Summers, 2015), fiscal consolidations can be self-defeating in terms of economic activity and debt as a result of the permanent effects via hysteresis. In the context of the Euro zone, the QUEST model of the EU Commission points out that the fiscal consolidation, if needed, was too fast and, as a consequence, there were cumulative deviations from the GDP baseline scenarios. (Rannenberg et al., 2015) find similar results. Concerning the fiscal rules, the deterioration in the fiscal positions in conjunction with the debt and deficit caps may have also contributed to the change in the EU fiscal stance. In this regard, it is important to highlight that the inexistence of countercyclical fiscal policies during the decade before the financial crisis did not allow for the creation of buffers in good times, thus restricting the use of countercyclical fiscal policies during bad times.
The covid recession.
The fiscal rules in the aftermath of the covid recession.
Before 2008, the mainstream economic consensus was based around the idea that monetary policy was the best tool to stabilise aggregate demand and achieve low inflation. In this regard, fiscal policy was confined to the passive role of pursuing debt sustainability and debt reduction, relying mainly on automatic stabilizers and the use of discretionary policies in periods of major distress. This consensus started to be abandoned during the aftermath of the GFC mainly as a consequence of the Zero Lower Bound and the effectiveness of fiscal policy in environments characterised by lower interest rates and higher than one fiscal multipliers. As argued by (Blanchard, 2019), the economic environment that characterised the last decade was propitious to mitigate (or even eliminate) the negative welfare consequences of deficits. To support this argument, he shows that the international budget constraint and, more specifically, the solvency condition was not as binding as in the past due to the fact that the difference between the interest rate on public debt and the GDP growth rate has been steadily decreasing. In this situation the debt ratio tends to decline because the borrowing “pays for itself”. Apart from the results, it is also empathised that in the long term the negative differential between the interest rate and the GDP growth should not be assumed. Another of the characteristics of the post-GFC economies has been the higher levels of public debt. This trend has been exacerbated by the sluggish recovery following the Euro zone debt crisis and, more recently, by the Covid induced recession.
Proposals of reform.
 The periods taken into account in the sample go from 1980 to 1997 and from 1998 to 2019.
 Understanding this as contained levels of debt over the medium to long term.
 The fiscal impulse takes into account the automatic fiscal stabilisers, the fiscal stance and the interest payments. Concerning the fiscal stance, it includes the discretionary measures as well as other components not directly influenced by policy (such as revenue windfalls /shortfalls, built-in momentum of public expenditure and factors related with output gap estimators).
 For a more detailed explanation about how the Euro zone crisis unfolded, see (Baldwin & Giavazzi, 2015).
 According to the 2011 World Economic Outlook, the fiscal multipliers of the eurozone were around 0.5. In this context, the effects of fiscal consolidations on the level of GDP are lower than the fiscal gains obtained. In contrast with these results, (Blanchard & Leigh, 2013) pointed out that the fiscal multipliers of the eurozone around that time were 1.3.
 See (Ardagna, 2004; Giudice et al., 2004).
 GIIPS stands for Greece, Italy, Ireland, Portugal and Spain.
 More specifically, as argued by (Debrun et al., 2021) the reductions in public investment may be behind these severe effects of the crisis.
 In line with (Alesina et al., 2017), the Commission also highlighted that the fiscal adjustments based on spending costs appeared to be less costly than the ones based on tax increases.
 See (Veld, 2013).
 According to the fiscal rules, the contribution of fiscal policy to macro stabilisation was mainly possible as a consequence of the free operation of automatic stabilisers over the business cycle. Discretionary measures, if allowed, must be within the limits stablished by the SGP.
 This targeted fiscal policy was able to minimise the possible hysteresis effects through the preservation of the productive fabric.
 See (European Commission, 2021).
 Concerning the automatic stabilisers, the Commission acknowledges that due to the uncertainties surrounding the estimation of potential growth, the impact of these could be subject to larger revisions than normally.
 The implementation of the SURE resembles some of the proposals related with the creation of a European unemployment reinsurance scheme.
 The amount takes into consideration current prices.
 In addition to this, it is important to mention that the size of the NGEU will also contribute to the development of the EU capital markets, thus enhancing the financial architecture of the euro. (Christie et al., 2021).
 According to the regulation proposal of the EU Commission, around one quarter of the NGUE will be disbursed between 2021 and 2022.
 For a more in-depth analysis of the constraints faced by monetary policy see (Vítor Constâncio, 2020).
 In the paper Blanchard also highlights that his analysis is subject to some other caveats and, therefore, the results should not be interpreted as a direct political recommendation. In (Charles Wyplosz, 2019), an analysis of some of the problems of Blanchard’s analysis is exposed.
 It should be noted than in the period between 2014-2019 a slow reduction of debt-to-GDP was taking place among the countries considered.
 The fiscal gap gives information about the immediate and permanent change of the primary balance that is required to stabilise the debt as a percentage of GDP at its current value for a specific period of time.
 The PEPP is exempt from the limits regulating the maximum amount of public debt that the ECB can purchase in the secondary market. These limits are set around the capital key and the 33% of the total debt in circulation.
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