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Fiscal Policy and Taxation

Selected e-articles

Abstract: Independent central banks typically counteract positive fiscal shocks that would otherwise increase the inflation rate above the target. In a theoretical model, we show that, in a monetary union, this mechanism implies weaker responses to national fiscal shocks because the overarching central bank must account for the fiscal policies of all members. The model highlights that the response is especially weak for small members, given their marginal impact on the union’s aggregate inflation rate. Empirically, we exploit the exogenous variation in elections to show that the European Central Bank reacts more vigorously to fiscal shocks from larger countries. We then provide evidence that small countries take advantage of this; they engage more in fiscal expansions during election years than large countries. In an extension, we discuss, both theoretically and empirically, why the difference between small and large countries disappears in times of crisis. Monetary union membership weakens central bank deterrence of fiscal waste in the EMU. We assess ECB behavior using a forward-looking Taylor rule with backward-looking IVs. The ECB increases rates if large or many EMU members are in an election. Thus, small members run larger deficits as they impact EMU aggregates negligibly.

Abstract: We know relatively little about democratic responsiveness on fiscal policy, an area in which both bond markets and European Union (EU) rules constrain European governments’ freedom of action. Has their adoption of fiscal responsibility laws (FRLs)—a politically appealing mechanism to restrain deficit spending—in recent decades been the result of their heeding public opinion or ignoring it? Our analysis finds a mixed picture: the strengthening of FRLs generally occurred in the presence of public support for debt reduction, but this public opinion effect is stronger in countries with more majoritarian electoral systems than those with more proportional systems. And although elections induce attentiveness to public attitudes, election proximity did not have a meaningful effect on governments’ responsiveness to the public’s fiscal preferences. Our explanation for this finding emphasizes the durability of support for debt reduction and political parties’ greater sensitivity to median voter positions in more majoritarian electoral systems. These findings deepen our understanding of both austerity politics and democratic performance in Europe, affirming a degree of responsiveness that would be tested in the event of a future debt crisis.

Abstract: A reform of the fiscal framework in the European Union is currently under discussion. The way ahead is yet unclear. In revisiting the importance of monetary and fiscal policy coordination to reduce uncertainty during the Eurozone Crisis, we add to this discussion a database that comprises daily official data on every policy action from 2007 to 2016 taken by the European Central Bank, the European Commission, and other governmental actors as a free download. Then, we investigate the effect of fiscal policy in an event-study analysis. We find that most measures designed to strengthen the existing Maastricht 1.0 framework of the European Monetary Union (e. g., fiscal compact) are not correlated with yield spreads reduction and do not have any causal effect on uncertainty. Events signaling out financial stability and financial assistance among European Monetary Union member states are likely to have that effect in comparison. After Germany’s Bundestag ratified the European Stability Mechanism and when the Federal Constitutional Court approved its legitimacy, yield spreads of Greece, Ireland, Italy, Portugal and Spain significantly decreased.

Abstract: Does the framing of crises shape public support for inter-state solidarity? We focus on three dimensions that have been salient in the characterisation of European Union crises and may affect public support for solidarity more generally: (a) how country-specific or common a crisis is; (b) whether policymakers are seen as responsible for the crisis or not; and (c) how existential or manageable the threat posed by a crisis appears. We employ a pre-registered factorial vignette experiment conducted in 15 European Union countries to assess how characterising a hypothetical crisis affects voter support for fiscal and financial solidarity. Our results show that exposure to different crises frames shapes public support for risk-sharing in the European Union. Changes in solidaristic attitudes vary significantly with the means of fiscal risk-sharing proposed.

Abstract: The COVID-19 crisis has put the European Union's (EU) ability to respond to external challenges to test. It is not a new issue that has arisen due to the current crisis. The global economic crisis of 2008, and, in particular, the sovereign debt  crisis of 2010, highlighted the need for institutional, policy and political reform to ensure the stability and long-term sustainability of the EU project. The EU's asymmetric degrees of integration, in terms of Economic and Monetary Union (EMU) and non-EMU members, resulted in a diverse response to the crisis and, more importantly, mixed-effects from monetary and fiscal policies. This study aims to research the impact of monetary and fiscal policies between 2007 and 2015 on economic growth and employment. The findings show that loose monetary policies at the EU, EMU and non-EMU levels boosted economic growth and development. On the other hand, restrictive Fiscal policy had favourably influenced GDP and employment by reducing inflationary pressures produced by expansive monetary policy. However, fiscal policy had a greater impact in the non-EMU countries, demonstrating that this policy can act as a stabilizing force in the face of an overly expansive and common monetary policy. In order to respond effectively to the current and future crises, the EU government should overhaul the way monetary and fiscal policy is conducted and coordinated.

Abstract: EU corporate tax policy has long consisted solely in eliminating fiscal barriers. This changed after the financial and Eurozone crises when the European Commission proposed ‘market-correcting’ provisions to increase tax transparency and ‘fairness’, which were partially adopted by the Council. Analyses of EU responses to the crisis have largely ignored taxation issues. This article fills this gap and explains the substantive re-orientation of EU corporate tax policy through the concept of politicization. Based on 19 expert interviews, it details the politicization process of corporate taxation resulting from changes in global governance, media tax scandals, and the work of non-governmental organizations (NGOs). Through the politicization dynamic, new institutional and discursive opportunities were exploited by the European Commission, Parliament and NGOs to induce policy change. We explore this reciprocal interaction between social forces and supranational actors to demonstrate that ‘politicization at the top’ can facilitate a more progressive deepening of European integration.

Abstract: Though macro-prudential policy is usually aimed at mitigating financial instability, in the European Union it mainly consisted of a discretionary use of old policy tools, such as micro prudential measures, which might have worsened an ongoing financial crisis. Two episodes will be examined: the 2011 special recapitalization of banks and the 2014 Asset Quality Review and stress tests. The metric for the EBA 2011 recapitalization was the ratio of capital to risk-weighted assets. In this exercise, unlike Basel II and III prescriptions, all government bonds had to be accounted for at their current valuation. This feature has not yet been included in any piece of EU legislation and was therefore highly discretionary. Given the falling prices of some European countries’ government bonds, peripheral countries’ banks were in need of more capital. Therefore, they may have reduced credit, especially to SME, or worsened credit conditions. The 2014 stress tests examined the solvency of banks with the same metric and parameters taken from a macroeconomic scenario that was a remake of the 2007–2008 financial crisis. This contrasted with the macroeconomic reality of the time in which a restrictive fiscal policy was affecting firms’ cash flows and hitting, in particular, peripheral countries.

Abstract: The pandemic crisis, responsible for increased levels of financing with public debt and contingent liabilities, may trigger another debt crisis across the European Union. Our research indicates that member states are increasingly willing to use public guarantees and other off-budget instruments, which are classified as "hidden debt" or "hidden expenditure". Simulations have shown that if public guarantees have to be covered by the budget, an unprecedented increase in a public debt may occur across the euro area countries and the entire EU as a whole. Therefore, the authors recommend the introduction of uniform rules for estimating fiscal risk due to contingent liabilities, as well as standards for their reporting, allowing for their constant monitoring at the EU level.

Abstract: This research aims to provide an empirical assessment of the relationship between fiscal policy sustainability factors, like fiscal deficit and economic growth in the Western Balkan countries and East European Union Countries, using panel-level data for the yearly time span from 2000-2021. The empirical model provides the impact of fiscal deficit, alongside other control variables like inflation, schooling, total investments, trade openness, and output gap on economic growth in the selected group of countries. For the purpose of research, we employed Static and dynamic panel estimation techniques like Fixed Effects with Driscol and Kraay standard errors and system GMM. The findings confirm that fiscal deficit has significantly affected the growth level in both groups of countries. In addition, when the fiscal deficit has interacted with the COVID-19 dummy, it appears as a growth-enhancing factor. However, when the fiscal deficit interacts with the Eurozone debt crisis period, it becomes a growth-deteriorating factor. Other control variables like inflation, trade openness, total investments, and the output gap are found important factors in explaining the growth performance of the Central East European and Western Balkan countries.

Abstract: The regions of the European Union are currently experiencing a period of seismic change that has transformed their established voting patterns and increased anti–European Union voting. Applying objective economic measures, spatial econometrics and municipal voting data from recent elections and a referendum, this study examines the factors shaping anti–European Union votes in Greece. The results indicate a strong link between the country’s changing economic geography and the geography of the anti–European Union vote, providing evidence not only of the ‘geography of discontent’ and the ‘left-behind hypothesis’ but also of the ‘geography of austerity’ associated with the heterogeneous effects of fiscal consolidation and austerity policies.

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