Fiscal Devaluations in the Euro Area: What has been done since the crisis?

Laura Puglisi

No 47, Taxation Papers from Directorate General Taxation and Customs Union, European Commission

Abstract: In recent years, the concept of a fiscal devaluation has been advocated as fiscal policy alternative to nominal exchange rate devaluations for peripheral deficit countries in the euro area to regain competitiveness. This paper investigates if countries in the euro area implemented fiscal devaluations in the aftermath of the economic and financial crisis and if so, how these reforms are expected to affect their competitiveness positions. Despite much discussion, no country has yet undertaken a substantial fiscal devaluation. Some (targeted) reductions in social security contributions were introduced, mainly to create job incentives, while consumption taxes (VAT) were increased – in some cases substantially – mainly for consolidation purposes. Although countries could benefit from a fiscal devaluation, their feasibility is politically constraint and effects are likely to be small in magnitude relative to the size of economic problems. Overall, fiscal devaluations cannot be a substitute for deep structural reforms that are urgently needed to address the underlying weaknesses of European economies.

Keywords: Taxation; European Union; Euro Area; tax policy; fiscal devaluation; VAT; social security contributions; political economy; cost competitiveness (search for similar items in EconPapers)
JEL-codes: F10 H24 H87 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2014-10
New Economics Papers: this item is included in nep-eec and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (11)

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