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Discretionary Fiscal Policy in the EMU Context: An Empirical Approach (1981-2010) & the Recent Reform in European Governance

Dionysios K. Solomos and Dimitrios N. Koumparoulis

European Research Studies Journal, 2012, vol. XV, issue 2, 117-136

Abstract: This paper attempts to investigate how the Maastricht criteria and the Stability and Growth Pact (SGP) have impaired the capacity of Euro Zone (EZ) national authorities to conduct discretionary fiscal policy. We estimate fiscal determinants for the structural (discretionary) public deficit over the period of 1981-2010, estimating panel data equations in order to increase the strength of the test by enhancing the time series dimension of the data by the cross section. We find that the degree of the countrecyclicality of discretionary fiscal policy has been reduced significantly after the Maastricht Treaty. Also, there is empirical evidence that national fiscal rules have a significant positive impact in budgetary outcomes. Regarding the recent reform of the European governance framework, we consider that the context of the reform seems incapable of dealing with the factors which are responsible for the sovereign debt crisis. We stress the need for reforms in the financial sector which seem necessary to ensure in association with sound fiscal policies the stability in euro area.

Keywords: Fiscal Policy; Discretionarity; Countercyclicality; Flexibitlity; Stability and Growth Pact; Business Cycle; National Fiscal Rules; Sustainability; Fiscal Discipline (search for similar items in EconPapers)
JEL-codes: H60 (search for similar items in EconPapers)
Date: 2012
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