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The determinants of austerity in the European Union 2010-16

Roberto Tamborini () and Matteo Tomaselli ()

No 2019/6, DEM Working Papers from Department of Economics and Management

Abstract: This paper aims at explaining what drove the adoption of austerity policies over the period 2010-16 in a panel of 28 European countries. Austerity is identified by year increases in the ratio between the structural primary balance and potential GDP. By means of principal component factor analysis we select the aggregate factors that might affect austerity, namely (i) fiscal consolidation (correction of high deficits and debts), (ii) market discipline (high sovereign spreads, low ratings), (iii) rule-based fiscal discipline (compliance with the Eurozone rules), and macroeconomic stabilisation (consideration for the cyclical position of the economy). Then we estimate a dynamic panel model with the system-GMM method. Results show that the most important contributions to austerity are provided by the market discipline and fiscal consolidation factors together with Excessive Deficit Procedures, with no significant role played by concomitant macroeconomic conditions. Overall, governments complied with orthodox fiscal principles and rules.

Keywords: Austerity; Fiscal reaction functions; Principal component factor analysis; Dynamic panel data analysis (search for similar items in EconPapers)
JEL-codes: E6 E62 E65 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-eec and nep-mac
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Journal Article: The determinants of austerity in the European Union 2010–16 (2020) Downloads
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