Chart of the week: the fiscal stance in the euro area

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Chart of the week: the fiscal stance in the euro area

The size of the deficit reduction mandated by European fiscal rules for euro area countries currently under excessive deficit procedure will be on ave

Publishing date: 25 June 2012
Authors: André Sapir Benedicta Marzinotto

The size of the deficit reduction mandated by European fiscal rules for euro area countries currently under excessive deficit procedure will be on average nearly 1.5 percent of GDP per year in the next two years. While such adjustment would not be overly restrictive in normal times, it is undesirable in countries that are already in recession. The risk is particularly important in Cyprus and Spain which need to undertake cumulated fiscal adjustments of more than 6 percentage points of GDP in 2012 and 2013 in order to satisfy European fiscal rules.

Graph 1: The cumulated size of deficit reduction over 2012-2013, % of GDP

Source: Authors’ own elaboration based on National Stability Programmes and Commission’s Spring Economic Forecast, May 2012.

There is much talk about fiscal austerity in the euro zone and concern is expressed about the fact that significant deficit reduction may produce large drops in output, which is undesirable in bad times. What is the exact size of deficit reduction over the next two years?

We calculated the size of deficit reduction in all the countries that are at present under excessive deficit procedure and need to correct excessive nominal deficits either by 2012 (Cyprus and Belgium) or by 2013 (all others, excluding Estonia, Finland, Luxembourg and the three programme countries Greece, Ireland and Portugal, which have their own timetable).

We distinguish between corrective measures that have already been envisaged in the national Stability Programmes of April 2012, which we classify as “planned”, and the extraordinary measures that are not planned but deemed necessary to obey by the agreed deadlines for correction; these are classified as “extra” and are calculated as the distance of the deficit level forecasted by the Commission from the 3%-of-GDP level in the target year. As the Commission’s forecast for 2013 does not include the fiscal policy measures that will be implemented in 2013, we assume quite optimistically that national fiscal plans perfectly anticipate fiscal policy outputs in 2013.

Over 2012-2013, the average cumulated planned fiscal contraction is 2.75 percent of GDP, thus an annual cut of 1.4 percent, which is certainly not desirable in bad times but it is not dramatic either. The average cumulated fiscal contraction (including both planned and extraordinary interventions) reaches 3 percent of GDP over the two years, leaving the annual adjustment effort at 1.5 percent of GDP.

What is but striking is the large cross-country variation with a very restrictive fiscal stance especially in Spain and Cyprus, as both should go through a cumulated deficit reduction in 2012 and 2013 that is above 6 percent of GDP.

About the authors

André Sapir

André Sapir, a Belgian citizen, is a Senior fellow at Bruegel. He is also University Professor at the Université libre de Bruxelles (ULB) and Research fellow of the London-based Centre for Economic Policy Research.

Between 1990 and 2004, he worked for the European Commission, first as Economic Advisor to the Director-General for Economic and Financial Affairs, and then as Principal Economic Advisor to President Prodi, also heading his Economic Advisory Group. In 2004, he published 'An Agenda for a Growing Europe', a report to the president of the Commission by a group of independent experts that is known as the Sapir report. After leaving the Commission, he first served as External Member of President Barroso’s Economic Advisory Group and then as Member of the General Board (and Chair of the Advisory Scientific Committee) of the European Systemic Risk Board based at the European Central Bank in Frankfurt.

André has written extensively on European integration, international trade and globalisation. He holds a PhD in economics from the Johns Hopkins University in Baltimore, where he worked under the supervision of Béla Balassa. He was elected Member of the Academia Europaea and of the Royal Academy of Belgium for Science and the Arts.
Benedicta Marzinotto

Benedicta Marzinotto was a Resident Fellow at Bruegel from 2010 to 2013. She is now with the European Commission as a Policy Analyst – Economist, Labour market reforms, at DG ECFIN.

She is also a Lecturer in Political Economy at the University of Udine and Visiting Professor at the College of Europe (Natolin Campus).

Her research for Bruegel focused on EU macroeconomic developments, EU Institutions, finance and growth. More precisely, she was working on the macroeconomics of the recent crisis, the competitiveness debate (macro and micro-approach), the role of the EU budget in the crisis and the impact of financial regulation on economic growth.

From 2004 to 2009, Benedicta was a Research Fellow in the International Economics Programme at Chatham House. She also has experience as a freelance political economic analyst. She has held visiting positions at the Free University of Berlin and at the University of Auckland.

Benedicta holds a MSc and PhD in European Political Economy from the London School of Economics. Her research interests include: EU macroeconomics, EU economic governance, varieties of capitalism, and labour markets institutions.

She is fluent in Italian, English and German.