Causes and Effects
Studies in Fiscal Federalism and State-local Finance series
Edited by Ehtisham Ahmad, Massimo Bordignon and Giorgio Brosio
Chapter 1: Promoting stabilizing and sustainable sub-national fiscal policies in the Euro area
The Euro area (henceforth EA) has been buffeted by major shocks in the last five years or so, first the global financial crisis and subsequently its own crisis, which affected most acutely the so-called ‘periphery’ (Cyprus, Greece, Ireland, Italy, Portugal and Spain), but also impacted adversely, because of its economic and financial integration, the rest of the area. There are, as of mid-2014, incipient signs of recovery of confidence and demand in most of the EA, but growth in output remains subdued, and too low to make a significant dent in the area’s historically high unemployment rates. The stresses associated with needed adjustments continue to have political reverberations, especially in Greece. The public finances of the EA member countries have been sharply impacted by the two crises, through the operation of the automatic stabilizers, discretionary stimulus packages in 2008–09, and in some countries the realization of contingent liabilities, particularly from rescue operations for domestic banks. The average overall general government (GG) deficit in the EA jumped from under 1 percent of GDP in 2007 to over 6 percent of GDP in 2009–10, and remains slightly above 3 percent of GDP, despite substantial fiscal consolidation efforts in a number of the area’s countries (Figure 1.1).