FISCAL POLICY - Paper - Sheffield Political Economy Research Institute

Fiscal policies after the crisis: a cross-country study in the Euro Area

Azzurra Rinaldi*

Abstract

The last financial crisis highlighted the fact that, despite the global adoption of capitalism as the most efficient model of production, many capitalist countries reacted in a very different way and this is also true among the Euro Area countries.

On the whole, national governments tended to react to the financial crisis by adopting restrictive fiscal policies based on the cut of public spending and the rise of taxes. In many cases, this has seemed the only feasible choice: in the most vulnerable five members of the Euro Area (Ireland, Spain, Portugal, Greece and Italy), the level of government debt

before the crisis was

unsustainable. In 2011, these countries produced 40% of total public debt in the Euro Area and 48% of total budget deficit.

The economic costs associated to the financial crisis make more difficult the implementation of fiscal policy. On the contrary, fiscal policies adopted during financial crisis may have long-term effects on productivity growth and economic efficiency once the crisis is over. However, despite the fact that fiscal policy may play a key role in facing the existing crisis and in enhancing the medium-term growth prospects, this role has not been studied with detail in the literature.

Our research wants to highlight the different answers of the Euro Area governments to the international crisis and also to investigate the timing of the actions taken in order to try to stop recession. To this aim, we use a cross-country analysis of data on fiscal stimulus, tax revenues as a share of GDP and the fiscal space before the crisis that reveal to be useful in the comprehension of the fiscal policies adopted by most countries in the Euro Area.

Keywords: fiscal policy, tax revenues, financial crisis, fiscal stimulus, Euro Area. *

Unitelma-Sapienza University of Rome. 1

1. Euro Area and the crisis: an overview

Four years have passed since the start of the Great Recession, yet the Euro Area remains in crisis. There are several indicators that may confirm that the Euro Area is still facing the crisis: GDP and GDP per head are below their pre-crisis level, the unemployment rate has reached a historical record level of 12.2 % in April 2013, the industrial production decreased 0.6% in the same month compared with April 2012. We should also highlight that this is the slowest contraction since November of 2011. The major issue for most countries still remains the sustainability of public debt.

1.1.

Gross Domestic Product

The global economic and financial crisis that started in 2008 had a deep impact on the European Union and the Euro Area member states' economies.

Eurostat - Tables, Graphs and Maps Interface (TGM) graph pr...

http://epp.eurostat.ec.europa.eu/tgm/graphPrint.do?tab=grap...

Chart 1 - Euro Area GDP Growth rates with respect to the previous year and over the previous quarter

Source: Eurostat.

Source of Data Eurostat Date of extraction: 20 giu 2013 15:32:19 CEST Hyperlink to the graph: http://epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&plugin=1&language=en&pcode=teina011 Disclaimer: This graph has been created automatically by Eurostat software according to external user specifications for which Eurostat is not responsible. Footnotes have not been included. General Disclaimer of the EC: http://europa.eu/geninfo/legal_notices_en.htm Short Description: Gross domestic product (GDP) at market prices is the final result of the production activity of resident producer units (ESA 1995, 8.89). It is defined as the value of all goods and services produced less the value of any goods or services used in their creation. Data are calculated as chain-linked volumes (i.e. data at previous year's prices, linked over the years via appropriate growth rates). Growth rates with respect to the previous quarter (Q/Q-1) are calculated from calendar and seasonally adjusted figures while growth rates with respect to the same quarter of the previous year (Q/Q-4) are calculated from raw data. Code: teina011

By the end of 2011, GDP trend over the previous quarter has always been negative, contradicting the recovery that had been observed from the end of 2009. Indeed, in the third quarter of 2011, the 2

Euro Area seems to have entered a new recession. GDP growth rates with respect to the same quarter of the previous year show that the situation is worsening, since GDP contraction has reached 1.6% on an year on year basis.

Within the Euro Area, Germany shows the better performance in terms of GDP at current prices during the years from 2003 to 2012, followed by France, Italy and Spain. Since 2007, GPD in Germany and France is also increasing, while in Italy it is slightly rising and in Spain it is decreasing. The lowest levels of GPD have been registered in Malta and Cyprus during the whole decade.

Chart 2 - GDP current prices

3.000.000 2.250.000 1.500.000 750.000 0 2003

2004

2005

2006

Belgium Ireland France Luxembourg Austria Slovakia

2007 Germany Greece Italy Malta Portugal Finland

2008

2009

2010

2011

2012

Estonia Spain Cyprus Netherlands Slovenia

Source: Eurostat.

1.2.

Private consumption expenditure

Issues for the Euro area are also related to the private consumption expenditure performance. Final consumption expenditure on goods and services growth rates with respect to the previous quarter reached -0.7% in the fourth quarter of 2011. The situation could be improving, since it has been 0.1% in the first quarter of 2013. 3

Eurostat - Tables, Graphs and Maps Interface (TGM) graph pr...


Chart 3 - Private consumption expenditure growth rates quarter on quarter and year on year

Source: Eurostat. Source of Data Eurostat Date of extraction: 21 giu 2013 11:08:44 CEST Hyperlink to the graph: http://epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&plugin=0&language=en&pcode=teina021 Disclaimer: This graph has been created automatically by Eurostat software according to external user specifications for which Eurostat is not responsible. Footnotes have not been included. General Disclaimer of the EC: http://europa.eu/geninfo/legal_notices_en.htm Short Description: Final consumption expenditure consists of expenditure incurred by resident institutional units on goods or services that are used for the direct satisfaction of individual needs or wants or the collective needs of members of the community. The final consumption expenditure may take place on the domestic territory or abroad (ESA 1995, 3.75). Private final consumption expenditure includes households' and Non Profit Institutions Serving Households (NPISH's) final consumption expenditure. Data are calculated as chain-linked volumes (i.e. data at previous year's prices, linked over the years via appropriate growth rates). Growth rates with respect to the previous quarter (Q/Q-1) are calculated from calendar and seasonally adjusted figures while growth rates with respect to the same quarter of the previous year (Q/Q-4) are calculated from raw data. Code: teina021

Indeed, private consumption expenditure growth rates with respect to the same quarter of the previous year leave no place to hope: during the first quarter of 2013, they remain -1.6%. They also show that a new recession is hitting the Euro Area, since private consumption expenditure has started to be negative since the last quarter of 2011, with a negative peak of -1.8% ???? In the third quarter of 2012. Furthermore, private consumption is expected to remain low, since households and banks continue to repair balance sheets and consumers and investors act 1 di 1

21/06/13 11:09

carefully in an environment which is still very uncertain.

1.3.

Inflation

According to Eurostat’s estimate, the inflation rate in the Euro Area was recorded at 1.4 percent in May 2013 up from 1.2% in April. This increase was due to the rise of services prices, which is in turn related to the increase in food prices. Furthermore, annual inflation rates are expected to be subject to some volatility during 2013 the year caused by the effects relating to energy and food prices. Since inflation is still low, anyway, the European Central Bank could lower rates. Fiscal consolidation could proceed rapidly in those countries where market pressure is high, and more cautiously in other countries, in order to help support demand in the region.

4

Chart 4 - Inflation

Source: Eurostat.

As we may see in Map 1, in 2012, according to the Eurostat data, the highest levels of inflation have been recorded in Estonia (4.2%), Slovakia (3.7%), Italy (3.3%) and Finland (3.2%). Lowest rates of inflation have been observed for Germany (2.1%), Ireland (1.9%) and Greece (1.0).

In May 2013, the inflation rate in Estonia was recorded at 3.3%. During the period from 1999 to 2013, Estonia inflation rate averaged 4.15%, but it reached an all time high of 11.4% in June 2008 and a record low of -2.2% in October 2009.

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Map 1 - Inflation in the Euro Area members - 2012

Source: Eurostat.

Source of Data Eurostat Copyright of administrative boundaries: ©EuroGeographics, commercial re-distribution is not permitted Last update: 17.05.2013 Date of extraction: 21 giu 2013 12:58:58 CEST Hyperlink to the map: http://epp.eurostat.ec.europa.eu/tgm/mapToolClosed.do?tab=map&init=1&plugin=1&language=en& In the same month of May 2013, the inflation rate in Italy was 1.1%. pcode=tec00118&toolbox=types Disclaimer: This map has been created automatically by Eurostat software according to external user specifications for which Eurostat is not responsible. Footnotes have not been included. The inflation rateofintheFinland was recorded at 1.6% in May 2013. Inflation rate in Finland reached a General Disclaimer EC: http://europa.eu/geninfo/legal_notices_en.htm Short Description: Harmonised Indices of Consumer Prices (HICPs) are designed for international comparisons of consumer record low of -1.54 Percent in October of 2009. price inflation. HICP is used for example by the European Central Bank for monitoring of inflation in the Economic and Monetary Union and for the assessment of inflation convergence as required under Article 121 of the Treaty of Amsterdam. For the U.S. and Japan national consumer price indices are used in the table. In May of 2013, inflation rate in Slovakia was recorded at 1.7%. During the years from 2002 to Code: tec00118

2013, Slovakia inflation rate averaged 3.9%. It reached an all time high of 9.8% in November 2003 and a record low of 0.4% in October of 2009.

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1.4.

Unemployment

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Since spring 2011, unemployment within the Euro Area has begun to increase rapidly. It is commonly known that unemployment is persistent: it tends to remain high the years after, once it has risen to a high level.

Chart 5 - Unemployment

Source: Eurostat.

The symptoms that unemployment is going to remain high in the coming years are already visible. In the past year alone unemployment has increased by 2 million people. Within 2011, long term unemployment has increased by 1.4 million people in the EU-27 and by 1.2 million people within the Euro area. In April 2013, unemployment rate in the Euro Area increased to a new all-time high of 12.2 percent, from 12.10 percent in March of 2013. This increase is primarily driven by soaring unemployment rates in Spain, Greece and Portugal. As a result of long-term unemployment, the 7

effective size of the workforce is diminished, which in turn can lead to a higher level in unemployment.

The effects of long-term unemployment could be sizable both on GDP growth and on public finances. Furthermore, long term unemployment could lead to a rising poverty, thus becoming a deep social issue.

Chart 6 - Long-term unemployment annual average in the Euro Area Members

15

11

8

4

0 2003

2004

2005

2006


2007

2008

Germany Greece Italy Malta Portugal Finland

2009

2010

2011

2012


Source: Eurostat.

The financial and economic crisis deeply affected unemployment in some of

the Euro Area

member states. This is the case of Ireland, whose unemployment rate was relatively small in 2007, accounting for 1.4% of the labour force and started rising since then. In 2012, long-term unemployment in Ireland reached 9.1%. The crisis has led to very high rates of long-term unemployment even in Greece. The long-term unemployment rate increased from 4.2% in 2007 to 8.8% in 2011, to 14-4% in 2012. Also the 8

Spanish long-term unemployment rate has followed the negative trend of many Euro Area members during the years between 2007 and 2011, having increased more than five times and having reached 11.1% in 2012. During the last decade, long-term unemployment has been one the most problematic feature for the Slovak government. Over the pre-crisis years, it started decreasing, still remaining the highest among the Euro Area member states (from 11.5% in 2004 to 6.5% in 2009). After the economic crisis, there has been a reversal in the trend and long-term unemployment rose back almost to the levels from the fist half of the decade. In 2012, it still amounted to 9,4%. Since 2009, even Estonia suffered one of the most rapid increases in the long-term unemployment within the Euro Area. The rate (as a share of the active population) decreased to 1.7% in 2008 from 2.3% in 2007. But it started to increase rapidly, reaching 7.7% in 2010. In 2012, it showed an encouraging reduction to 5.5%.

2. EU response to the crisis

Already in 2008, in view of the expected economic crisis, leaders of the G20 countries established to “use fiscal stimulus measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability”.

In late 2008, the European Commission launched the European Economic Recovery Plan (EERP), which objective was to provide a short-term impulse to demand, this way reinforcing competitiveness and sustaining potential growth. The total package amounted to 1.5% of European Union GDP (EUR 200 billion). Member States were asked to contribute around EUR 170 billion (1.2% of EU GDP) and EU and European Investment Bank (EIB) budgets about EUR 30 billion (0.3% of EU GDP).

Anyway, as the economic shortfall worsened, in 2010-11 the European Union and the International Monetary Fund together, for the first time, established large-scale financial assistance programs for Greece, Ireland and Portugal. This happened because, in 2010, the short-term priority was to face the difficulties that some of the Euro Area countries had to deal with.

9

In 2011, the European Council and the European Parliament adopted the so called "six-pack": a legislative package on economic governance in the member states, aimed at reinforcing the existing Stability and Growth Pact (SGP). While the SGP original focused was on the monitoring of member states' compliance with the targets for their budget deficits, the same method has been applied to their public debt levels.

In March 2011 the Euro Area members and six non-Euro Area countries adopted the Euro Plus Pact, building upon and going beyond the European Semester. The Euro Area members and also eight non-Euro Area countries signed the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (also known as the "fiscal compact"). The primary aim of the fiscal compact, which entered into force only on 1 January 2013, is to further strengthen fiscal discipline.

On October 2012, the Euro Area finance ministers inaugurated the European Stability Mechanism (ESM), a permanent crisis management mechanism with an effective lending capacity of €500 billion.

In June 2012, European leaders established a Single Supervisory Mechanism (SSM) for banks in order to coordinate the banking institutions in the member countries of the Euro Area as well as in those non-euro area countries that joined the mechanism.

Again in July 2012, the European Financial Stability Facility (EFSF) granted financial support to Spain. The European Commission had the role to monitor the resolution of banks, while the International Monetary Fund should provide technical assistance on the reforms needed in the financial sector. In April 2013, the European Stability Mechanism (ESM) board of governors decided to grant assistance to Cyprus.

In setting up the EU policy framework, the focus was on crisis prevention mainly through the Stability and Growth Pact and other surveillance mechanisms 10

3. How did the national governments react?

As it is suggested by a standard Keynesian framework, when governments engage in fiscal expansion, driven by an increase in public spending and cuts in taxes, they reduce the length of the crisis and improve medium-term growth. During crisis episodes, aggregate demand is boosted by higher public spending and lower taxes. Both measures tend to replace weaker private consumption as a growth engine (Arreaza, Sorensen, and Joshua, 1999); also, public investment can partially counterbalance the fall in private investment (Aschauer, 1989).

At first, like many other countries, governments in the Euro Area also adopted a range of fiscal stimulus measures to lessen the potential negative consequences of the crisis. The European Economic Recovery Plan was the framework for these policies. Anyway, after the first phase, when many member states adopted countercyclical policy responses, the burgeoning spreads of government bonds in some of the Euro Area members caused panic and drove european fiscal policy into an extraordinary regime of austerity. The reaction to the crisis was a restrictive fiscal response that led to a sharp rise in the public debt of all Euro Area countries. Indeed, while Member States already started fiscal exit in 2010, in 2011 all Euro Area countries decided to dismiss the fiscal stimulus measures which they had put into operation in 2009 to support their economies.

Higher deficits and debts were a necessary reaction by governments facing a deep recession and needing to get back to growth. It is widely accepted in the literature that during good times, growth is a short-term issue, while sustainability of public debt is a long-term one. Yet, fearing a sharp increase in interest rates and having to respect the constrains imposed by the Stability and Growth Pact, both member states and the European Commission changed priorities, even though transition towards normality had not been completed. This ideology has led most of the Euro Area member states to adopt fiscal procyclical measures during bad times, even though it is well known that countercyclical fiscal policies, like expansionary budget measures or the working of automatic stabilizers, have usually been effective in shortening recession episodes in advanced economies (IMF, 2009; IMF, 2010).

11

Euro Area members, and especially Southern European countries, have adopted precipitous measures, reaching in some cases a dimension that was never observed in the history of fiscal policy. From 2010 to 2012, the cumulative change in the fiscal stance for Greece reached 18 points of GDP. For Portugal, Spain and Italy, it amounted respectively to 7.5, 6.5 and 4.8 points of GDP. Furthermore, these measures rapidly lead to negative spillovers over the whole Euro Area, multiplying their first-round effects. Since economic growth slowed down, sustainability of public debt became ever less likely.

The fiscal support (or its missing) in the Euro Area member states is quite hard to capture. In order to get to a better comprehension of the fiscal packages of the Euro Area members, we provide a range of data on the general government deficit, on the general government debt, on government expenditure and revenue and on taxes.

3.1.

General government deficit

This ideology has led most of the Euro Area member states to adopt fiscal procyclical measures during bad times, even though it is well known that countercyclical fiscal policies, like expansionary budget measures or the working of automatic stabilizers, have usually been effective in shortening recession episodes in advanced economies (IMF, 2009; IMF, 2010).

Fiscal policy in the countries hit by the euro crisis has been very restrictive up to date and must be expected to remain restrictive in the medium term, according to the old Stability and Growth Pact (SGP) and its reinforced successor as well as to the new institutional arrangements to constrain public deficits and debts.

So, since now austerity has been the most frequently used strategy to exit the crisis. But austerity measures, the loss of confidence in the Euro and the stagnation of the euro financial system severely depressed growth, also due to the the absence of expansionary measures.

12

Chart 7 - General government deficit - Euro Area

Source: Eurostat.

As we observed, unemployment increased more than anticipated. Italy, Spain, Portugal and Greece seem to have dropped in a worsening depression. Unemployment rose to a record level in the Euro Area and especially in Spain, Greece, Portugal and Ireland. Governments of these countries still face unbearable risk premium on their interest rates, despite some policy measures, while Germany, Austria and France benefit from low interest rates.

13

Since 2011, spanish government has adopted restrictive fiscal policies, by raising income and sales taxes and cutting public expenditure. The austerity measures have contributed to worsening the country’s unemployment rate, which rose above 26%. This made it necessary to increase public spending on unemployment, which, together with other welfare benefits, pushed last year's budget deficit over its EU-approved target of 6.3%.

Chart 7 - General government deficit - Euro Area

10

0

-10

-20

-30

-40 2003

2004

2005

2006


2007

2008


2009

2010

2011

2012


Source: Eurostat.

In 2012, Greece’s government budget deficit reached -10% of the country's GDP, but the peak has been observed in 2009, when government deficit recorded -15.6% of GDP. The deficit actually rose during the decade before the crisis, when a big portion of rising government expenditures derived from the rising public sector wages and benefits. In 2009, Greek government expenditures accounted for 50% of GDP, with 75% of public spending reserved to the public sector wages and the social benefits.

14

Furthermore, according to the OECD, while total public expenditure mainly derived from the public administration expenditure, there has been “no evidence that the quantity or quality of the services are superior.” The general government deficit for Ireland was 7.6% of GDP in 2012 (€12,461 million in absolute terms), showing a decrease from the 2009 level of 13.9% of GDP (€22,368 million). In 2011 and 2012, Ireland’s general government deficit was lower and showed greater stability over compared with the figures for 2009 and, most of all, for 2010.

Portugal failed to achieve the 2012 deficit reduction target formulated by the national government . During the same year, general government deficit for 6.4% of GDP, also showing a worsening with respect to the previous year.

3.2.

General government debt

By the end of 2009, Euro Area government debt increased by 2.5% of GDP due to the austerity stabilization measures. At the country level, Belgium, Ireland, Luxembourg and the Netherlands showed the highest increases in government debt by 6.4%, 6.7%, 6.6% and 11.3% of GDP, respectively.

In the Euro Area, the government debt to GDP ratio increased from 87.3% at the end of 2011 to 90.6 % at the end of 2012. Within the Euro Area, at the end of 2012 the lowest ratios of government debt to GDP were recorded in Estonia (10.1%) and Luxembourg (20.8%). Twelve Euro Area Member States had government debt ratios higher than 60% of GDP: Greece (156.9%), Italy (127.0%), Portugal (123.6%), Ireland (117.6%), Belgium (99.6%), France (90.2%), Cyprus (85.8%), Spain (84.2%), Germany (81.9%), Austria (73.4%), Malta (72.1%) and the Netherlands(71.2%).

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stat - Tables, Graphs and Maps Interface (TGM) graph pr...

1


Chart 8 - General government debt - percentage of GDP

Source: Eurostat. Source of Data Eurostat Date of extraction: 19 giu 2013 14:03:26 CEST Hyperlink to the graph: http://epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&plugin=0&language=en&pcode=teina225 Disclaimer: This graph has been created automatically by Eurostat software according to external user specifications for which Eurostat is not responsible. Footnotes have not been included. General government debt in Greece still remains one of the fundamental weaknesses in the Euro General Disclaimer of the EC: http://europa.eu/geninfo/legal_notices_en.htm Short Description: Public debt is aid defined in the Maastricht consolidated generalto government debtup at nominal Area. The second package, whichTreaty givesasGreece access a €130 gross billion to 2014, together value, outstanding at the end of the year. The general government sector comprises central government, state government, local government, social security The€28 relevant definitions provided 479/2009, as amended withand the IMF loansfunds. worth billion will are surely be inaCouncil great Regulation hep in restructuring publicbydebt, but the Council Regulation 679/2010. Data for the general government sector are consolidated between sub-sectors at the national level. Theeconomic series are measured euro and presented a percentage of GDP. still makes this target hard to be reached. growthinperformance thataswould be needed Code: teina225

Italy's high public debt severely affects the country's growth prospects. Indeed, the high tax burden needed to service the debt severely limited the margin for countercyclical fiscal policies and for a growth-enhancing public expenditure. By pursuing a strategy of sizable fiscal consolidation, growth has further slowed.

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19/06/13 14:03

Map 2 - General government debt - percentage of GDP

Source: Eurostat

Source of Data Eurostat Copyright of administrative boundaries: ©EuroGeographics, commercial re-distribution is not permitted Last update: 18.06.2013 Date of extraction: 21 giu 2013 14:35:24 CEST Hyperlink to the map: http://epp.eurostat.ec.europa.eu/tgm/mapToolClosed.do?tab=map&init=1&plugin=1&language=en& 3.3. Government expenditure and revenue pcode=tsdde410&toolbox=types Disclaimer: This map has been created automatically by Eurostat software according to external user specifications for which Eurostat is not responsible. Footnotes have not been included. General Disclaimer of the EC: http://europa.eu/geninfo/legal_notices_en.htm Short Description: The indicator is defined (in the Maastricht Treaty) as consolidated general government gross debt at value, outstanding the end of the year inin theEuro following categories of government liabilities (as defined in ESA95): Innominal the years between at2009 and 2012, Area countries expenditures diminished by broadly currency and deposits, securities other than shares excluding financial derivatives, and loans. General government sector comprises subsectors: central government, state government, government social security funds. Basic datageneral are 1.8% of the GDP and revenues increased by 1.5%.local While the and main components of the expressed in national currency, converted into euro using end-year exchange rates for the euro provided by the European Central Bank (ECB). government expenditure are social benefits and social transfers, revenues mostly derive from Code: tsdde410

taxes from import and production and from taxes on income and wealth.

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21/06/13 14:35 17

Table 1 - General government expenditure and revenue

2008

2009

2010

2011

2012

TOTAL EXPENDITURE

47.1

51.2

51.0

49.4

49.4

Collective Consumption

8.0

8.6

8.4

8.2

8.1

Social Benefits

12.6

13.6

13.6

13.3

13.3

Social transfers

16.0

17.6

17.6

17.4

17.5

Interests

3.0

2.9

2.8

3.1

3.2

Subsidies

1.2

1.2

1.4

1.4

1.3

Gross fixed capital formation

2.6

2.8

2.5

2.3

2.2

Other expenditures

3.7

4.4

4.7

3.7

3.7

TOTAL REVENUE

45.0

44.8

44.7

45.3

46.2

Taxes on import and production

12.5

12.5

12.7

12.8

13.1

Current taxes on income and wealth

12.5

11.6

11.6

11.8

12.4

Actual social contributions

14.1

14.6

14.4

14.5

14.5

Other revenue

4.7

4.9

4.8

5.0

4.9

Source: European Commission.

Chart 9 shows that, during the last decade, despite the deep ongoing recession, governments in the Euro Area didn’t show any sign of countercyclical policy. Ireland is the only exception, since, in 2010, general government expenditure peaked to 67% (whereas the country was among the countries with the lowest levels until 2008).

Government expenditure in terms of GDP decreased in most of countries in the Euro Area between 2009 and 2010. In France, Austria and Slovenia, no change was observed during the same period, whereas the rise continued in Cyprus, Portugal and above all in Ireland. The highest levels of government expenditure (53% of GDP or more) were found in Belgium, Austria, France and Finland.

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Chart 9 - General government expenditure - percentage of GDP Spesa pubblica complessiva - % PIL 70

49,4 49,6 50,1 49,9 49,9 50,0 50,0

56

42

50,0 54,8 45,0 40,5 42,1 54,8 47,0 56,6 50,6 46,3 43,0 43,9 50,4 51,2 47,4 49,0 37,4 56,0

28

14

0 2003

45,4 45,6 46,0 46,2 46,2 46,2 46,3

46,4 50,8 45,2 40,2 34,6 44,7 36,4 51,7 47,7 40,0 42,1 40,5 46,4 48,7 41,0 45,0 33,1 53,7

2004

Belgium Irleand France Luxembourg Austria Slovakia

2005


2006

2007

2008

2009

2010

2011

2012


Source: Eurostat Entrate dello Stato complessive - % PIL 60

Government health spending in Ireland amounts at 8,9% of GDP. Ireland is also a specific case, 48 since expenditure somehow related to economic affairs is double the EU average. Indeed,

considerable capital injections into banks that the government made in 2011 were partly treated as capital transfers. France has one of the highest spending in social security protection 36

24

3.4.

Government revenue

12 -4,0 -4,0 -4,0 -3,7 -3,7 -3,7 -3,7

-3,6 -4,0 -0,8 -4,4 -4,2 0,2 -0,3 -7,5 10,0 10,6 -4,9 -2,9 -6,3 -1,2 -3,3 -0,8 -2,0

As we have seen before, general government revenue increased during the last years in the Euro 0 2003 countries. 2004 In 2012, 2005total general 2006 2007 2008 2009 2011 2012 Area government revenue amounted to 2010 46.2% of GDP, up from

Belgium

Germany

Estonia

France

Italy

Cyprus

Austria Slovakia

Portugal Finland

Slovenia

45.3% ofIreland GDP in 2011. During the Greece Spainyears from 2003 to 2012, the highest level of government Malta in Finland, Netherlands revenue Luxembourg has been recorded while Slovakia shows the lowest level.

19 Spesa dello Stato centrale - % PIL 60

45,4 45,6 46,0 46,2 46,2 46,2 46,3

46,4 50,8 45,2 40,2 34,6 44,7 36,4 51,7 47,7 40,0 42,1 40,5 46,4 48,7 41,0 45,0 33,1 53,7

France Luxembourg Austria Slovakia

27,0 27,0 27,0 22,8 22,8 22,8 22,8

22,3 31,4 13,9 30,4 35,6 41,3 20,4 22,3 28,6 36,8 31,0 43,7 29,0 26,6 35,2 30,6 21,3 27,7

Cyprus Netherlands Slovenia

Chart 10 - General government revenue - percentage of GDP Entrate dello Stato complessive - % PIL 60

48

36

24

12

-4,0 -4,0 -4,0 -3,7 -3,7 -3,7 -3,7

-3,6 -4,0 -0,8 -4,4 -4,2 0,2 -0,3 -7,5 10,0 10,6 -4,9 -2,9 -6,3 -1,2 -3,3 -0,8 -2,0 -3,3 -4,0 -2,5 -3,9 -6,4 -2,9 -4,0 -4,3 -2,3 -0,7 -6,3 -3,4 13,9

Italy Malta Portugal Finland

0 2003

2004

2005



2006

2007

2008

2009

2010

2011

2012


Source: Eurostat. Spesa dello Stato centrale - % PIL 60

3.5.

Taxes

48

Data on the initial fiscal conditions of the Euro Area members are of great utility, since they generally play a key role in crisis responses (Alesina et al., 2002). Authors find that countercyclical 36

fiscal policies lead to economic improvements after the crisis mostly when they don’t risk to affect fiscal sustainability. So, countries tend to adopt expansionary fiscal responses only if sufficient fiscal space had been made before the crisis.

24

Morris et al. (2009) show that, during the years before the crisis, many Euro Area member states

12

significantly increased tax revenues. These changes could hardly be explained by discretionary measures or by the development of typical tax base proxies. These revenues nevertheless improve the countries’ primary balance.

0

2003

2004

Belgium Ireland France Luxembourg Austria Slovacchia

2005


2006

2007


2008

20

2009

2010

2011

2012

ostat - Tables, Graphs and Maps Interface (TGM) graph pr...


Chart 10 - General government taxes on production and imports - percentage of GDP

Source: Eurostat. Source of Data Eurostat Date of extraction: 20 giu 2013 15:01:42 CEST Hyperlink to the graph: http://epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&plugin=1&language=en&pcode=tec00020 Disclaimer: This graph has been created automatically by Eurostat software according to external user specifications for which Eurostat is not responsible. Footnotes have not been included. Chart 10 - General government taxes on production and imports - percentage of GDP General Disclaimer of the EC: http://europa.eu/geninfo/legal_notices_en.htm Short Description: Taxes on production and imports (ESA95 code D.2) consist of compulsory, unrequited payments, in cash or in kind which are levied by general government, or by EU institutions, in respect of the production and importation of goods and 19employment of labour, the ownership or use of land, buildings or other assets used in production. In ESA95, taxes services, the on production and imports comprise taxes on products and other taxes on production. Code: tec00020

14 10 5 0

2003

2004

2005

2006


1

2007 Germany Greece Italy Malta Portugal Finland

Source: Eurostat.

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2008

2009

2010

Estonia Spain Cyprus 20/06/13 15:02 Netherlands Slovenia

2011

Indeed, Chart 10 shows that, during the years from 2002 to 2006, Euro Area members governments constantly rose the tax level. Despite a slight decrease of general government taxes on production and imports in 2009, since then, the Euro Area members experimented a stable albeit constant rise that is still ongoing. Euro Area member states seem to have quite a similar level of general government taxes on production and imports as a share of GPD, with the exception of Cyprus, whose level of taxation

tat - Tables, Graphs and Maps Interface experimented a brief (TGM) rise in graph 2006.pr...


Chart 11 - General government taxes on income and wealth - percentage of GDP

Source: Eurostat. Source of Data Eurostat Date of extraction: 20 giu 2013 15:03:49 CEST Hyperlink to the graph: http://epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&plugin=1&language=en&pcode=tec00018 Disclaimer: This graph has been created automatically by Eurostat software according to external user specifications for which generalFootnotes government on income and wealth, as it is shown in Chart 11, highlight Eurostat isEven not responsible. have nottaxes been included. General Disclaimer of the EC: http://europa.eu/geninfo/legal_notices_en.htm stable increase from 2009 on. Short Description: Current taxes on income, wealth, etc. (ESA95 code D.5) cover all compulsory, unrequited payments, in cash or in kind, levied periodically by general government and by the rest of the world on the income and wealth of institutional units, and some periodic taxes which are assessed neither on the income nor the wealth. In ESA95, current taxes on income, wealth, This variable shows a wider diversification among Euro Area Countries. etc. are divided into taxes on income and other current taxes. Code: tec00018

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a

Chart 12 - General government taxes on income and wealth - percentage of GDP

20

16

12

8

4

0 2003

2004

2005

2006


2007

2008


2009

2010

2011

2012


Source: Eurostat.

Finland has the higher level of government taxes on wealth and income, even if the finnish government started decreasing their weight since 2009, in a countercyclical perspective. Slovakia shows the smallest percentage of GDP deriving from taxes on income and wealth an it even decreased them since 2008. On the contrary, countries like France, Belgium, Greece and Ireland started rising the taxation level since the economic crisis of 2009, showing this way a procyclical policy.

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4. Conclusions

Many of the measures adopted by Euro Area members have been based on the hypothesis that the crisis arose from the fiscal profligacy of Member States, but, as it is quite clear now, the austerity strategy has been deeply weak: Euro Area members and especially Southern European countries have adopted precipitous measures, reaching in some cases a dimension that was never observed in the history of fiscal policy. From 2010 to 2012, the cumulative change in the fiscal stance for Greece reached 18 points of GDP. For Portugal, Spain and Italy, it amounted respectively to 7.5, 6.5 and 4.8 points of GDP. Furthermore, these measures rapidly lead to negative spillovers over the whole Euro Area, multiplying its first-round effects. Since economic growth slowed down, sustainability of public debt became ever less likely. As it is suggested by a standard Keynesian framework, when governments engage in fiscal expansion, driven by an increase in public spending and cuts in taxes, they reduce the length of the crisis and improve medium-term growth. During crisis episodes, aggregate demand is boosted by higher public spending and lower taxes. Both measures tend to replace weaker private consumption as a growth engine (Arreaza, Sorensen, and Joshua, 1999); also, public investment can partially counterbalance the fall in private investment (Aschauer, 1989).

At first, like many other countries, governments in the Euro Area also adopted a range of fiscal stimulus measures to lessen the potential negative consequences of the crisis. The European Economic Recovery Plan was the framework for these policies.

Anyway, after the first phase, when many member states adopted countercyclical policy responses, the burgeoning spreads of government bonds in some of the Euro Area members caused panic and drove european fiscal policy into an extraordinary regime of austerity. The reaction to the crisis was a restrictive fiscal response that led to a sharp rise in the public debt of all Euro Area countries. Indeed, while Member States already started fiscal exit in 2010, in 2011 all Euro Area countries decided to dismiss the fiscal stimulus measures which they had put into operation in 2009 to support their economies.

Something has been missing: a successful policy strategy should consider both the management of the financial crisis and the fall in aggregate demand. This is why it should be made of two 24

objectives: the first one, restructuring the financial system back; the other one, sustaining and increasing aggregate demand.

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