Abstract
Expansionary fiscal consolidation (or expansionary fiscal contraction, EFC) is the fundamental macroeconomic policy framework of the euro area. EFC argues that a carefully designed fiscal consolidation could lead to increases in aggregate output and consumption of firms and households through shifts in fiscal policy (expenditure and tax changes). Further, it is suggested that the higher the initial fiscal spending to GDP ratio, the greater the expansionary effect of fiscal spending reductions. The aforementioned argument is completely different from a Keynesian perspective, according to which a reduction in government expenditures or more taxation have contractionary effects on aggregate demand.
This chapter analyses the theoretical pillars of EFC thesis and assesses its implications in specific countries of the euro area in the period 2010–2016. It is argued that permanent fiscal consolidation is detrimental to economic growth in the euro area economies.
This chapter is organized as follows: after a brief introduction, Sect. 2 analyses the pillars of EFC thesis and discusses its main weaknesses. Section 3 analyses the effects of the EFC thesis on key macroeconomic variables in selected eurozone states, and Sect. 4 concludes.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsReferences
Alesina, A., & Ardagna, S. (1998). Tales of fiscal contractions. Economic Policy, 27, 487–545.
Alesina, A., & Ardagna, S. (2010). Large changes in fiscal policy: Taxes versus spending. In J. R. Brown (Ed.), Tax Policy and the Economy (Vol. 24). Cambridge, MA: NBER.
Alesina, A., & Perotti, R. (1995). Fiscal expansions and adjustments in OECD countries. Economic Policy, 21, 205–248.
Alesina, A., & Perotti, R. (1997a). The welfare state and competitiveness. American Economic Review, 87(5), 921–939.
Alesina, A., & Perotti, R. (1997b). Fiscal adjustments in OECD countries: Composition and macroeconomic effects. International Monetary Fund Staff Papers, 44(2), 210–248.
Ardagna, S. (2004). Fiscal stabilizations: When do they work and why. European Economic Review, 48(5), 1047–1074.
Barro, R. (1981). Output effects of government purchases. Journal of Political Economy, 89(6), 1086–1121.
Barro, R. J. (1974). Are government bonds net wealth? Journal of Political Economy, 82(Nov/Dec), 1095–1117.
Barro, R. J. (1979). On the determination of public debt. Journal of Political Economy, 7(5), 940–971.
Blanchard, O., & Leigh, D. (2013). Growth forecasts errors and fiscal multipliers (IMF Working Paper 13/1), Washington, DC.
Blanchard, O. J. (1990). Comments on Francesco Giavazzi and Marco Pagano: Can severe fiscal consolidations be expansionary? Tales of two small European countries. NBER Macroeconomics Annual, 5, 111–116.
Briotti, M. G. (2005). Economic reactions to public finance consolidation: A survey of the literature (Occasional Paper Series, No 38). Frankfurt: October ECB.
Broadbent, B., & Daly, K. (2010). Limiting the fall out from fiscal adjustments. Goldman Sachs Global Economics, Global Economics Paper (Vol. 195), Goldman Sachs.
Eurostat. (2017). Eurostat online database. Brussels.
Feldstein, M. (1982). Government deficits and aggregate demand. Journal of Monetary Economics, 9(1), 1–20.
Fels, G., & Froehlich, H. P. (1986). Germany and the world economy: A German view. Economic Policy, 4(April), 178–195.
Giavazzi, F., Jappelli, T., & Pagano, M. (2000). Searching for non-linear effects of fiscal policy: Evidence from industrial and developing countries. European Economic Review, 44, 1259–1289.
Giavazzi, F., & Pagano, M. (1990). Can severe fiscal contractions be expansionary? Tales of two small European countries. NBER Macroeconomics Annual, 5, 75–111.
Hazakis, K. (2015). The political economy of economic adjustment programs in the Eurozone: A detailed policy analysis. Politics and Policy, 43(6), 822–854.
IMF. (2003). Fiscal adjustment in IMF supported programs. Washington, DC: Independent Evaluation Office, IMF.
IMF. (2010). Will it hurt? Macroeconomic effects of fiscal consolidation. World Economic Outlook, October, 93–124.
Keynes, J. M. (1936). The general theory of employment, interest and money. London: Macmillan.
Kotios, A., & Galanos, G. (2012). The international economic crisis and the crisis of economics. The World Economy, 35(7), 869–885.
Lambertini, L., & Tavares, J. (2005). Exchange rates and fiscal adjustments: Evidence from the OECD and Implications for EMU. Contributions to Macroeconomics, 5(1), 1–28.
Maris, G., & Sklias, P. (2016). France, Germany and the new framework for EMU governance. Journal of Contemporary European Studies, 24(1), 1–23.
McDermott, C., & Wescott, R. (1996). An empirical analysis of fiscal adjustments. International Monetary Fund Staff Papers, 43(4), 725–753.
Perotti, R. (1999). Fiscal policy in good times and bad. Quarterly Journal of Economics, 114(4), 1399–1436.
Perotti, R. (2012). The Austerity myth: Gain without pain? In A. Alesina & F. Giovazzi (Eds.), Fiscal policy after the financial crisis (pp. 307–354). Chicago, IL: University of Chicago Press.
Reinhart, C., & Rogoff, K. S. (2010). Growth in a time of debt. American Economic Review, 100(2), 573–578.
Reinhart, C. M., & Rogoff, K. S. (2014). Recovery from financial crises: Evidence from 100 episodes. American Economic Review, 104(5), 50–55.
Samuelson, P. (1948). Economics: An introductory analysis. New York, NY: McGraw-Hill.
Schauble, W. (2011, September 5). Why austerity is only cure gor the Eurozone. Financial Times. Available from https://www.ft.com/content/97b826e2-d7ab-11e0-a06b-00144feabdc0
Sklias, P., Roukanas, S., & Maris, G. (2014). Keynes and the eurozone’s crisis: Towards a fiscal union. Procedia Economics and Finance, 66–73.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2018 Springer International Publishing AG, part of Springer Nature
About this chapter
Cite this chapter
Hazakis, K.J. (2018). The Expansionary Fiscal Consolidation Theorem in Doubt: Its Tragic Implications and Why It Should Be Avoided. In: Roukanas, S., Polychronidou, P., Karasavvoglou, A. (eds) The Political Economy of Development in Southeastern Europe. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-93452-5_1
Download citation
DOI: https://doi.org/10.1007/978-3-319-93452-5_1
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-93451-8
Online ISBN: 978-3-319-93452-5
eBook Packages: Economics and FinanceEconomics and Finance (R0)