The Fiscal Stimulus and Challenges Ahead: Views on the Euro Area

Authors


  • The author thanks the participants at the 39th Australian Conference of Economists, 27 September 2010, Sydney, and in particular Jan Libich, for helpful comments and discussions. He also likes to thank Ad van Riet for helpful suggestions. The opinions expressed in this article are those of the author and should therefore not be reported as representing the views of the European Central Bank or the Eurosystem.

: Jacopo Cimadomo, European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main. Email: jacopo.cimadomo@ecb.int

Abstract

Focusing on the euro area, this article discusses recent fiscal developments and the use of discretionary fiscal policies to stimulate economic activity. It is argued that, when adopting discretionary stimulus measures, policy-makers should take into account two factors: (i) ex ante fiscal plans and the perception of the state of the economy in “real-time” may be substantially different from what is observed ex post, based on revised data; (ii) discretionary fiscal policies seem to have become less effective over time to stimulate output in the euro area, also because of a more forceful reaction of monetary policy to fiscal expansions. In the specific context of the 2008–2010 global crisis, while the implementation of fiscal stimulus measures probably averted an even more severe contraction of economic activity, this came at the cost of mounting fiscal imbalances. At the European level, the necessary fiscal adjustment will need to be complemented by a reform of the European Union’s system of fiscal rules.

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