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Structural Challenges for Europe

Edited by Gertrude Tumpel-Gugerell and Peter Mooslechner

The main thrust of the book is that the sharing of mutual experiences is important for generating an acceptable policy mix, both at EU and national levels. The contributors highlight key financial issues, including the role of FDI and of foreign banks in the still ‘under-banked’ acceding countries, the re-launch of social security systems and the fiscal challenges of financing the catch-up process. They also examine the ongoing EU debate surrounding the application of the Stability and Growth Pact in Central and Eastern European Countries (CEECs) and go on to explore the contrasting evidence that some CEECs have shown more extensive privatisation efforts than some EU countries.
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Chapter 19: Assessing the smoothing impact of automatic stabilizers – evidence from Europe

Jesús Crespo-Cuaresma, Gerhard Reitschuler and Maria Antoinette Silgoner


Jesús Crespo-Cuaresma, Gerhard Reitschuler and Maria Antoinette Silgoner1 1. INTRODUCTION One of the subjects of major interest in European public finance is the discussion on the use of automatic stabilizers and their ‘superiority’ as compared to discretionary fiscal policy, which has often been responsible for increased cyclical volatility in the past three decades. The preference in European policy circles for automatic stabilizers becomes clear when reading the Stability and Convergence Programmes: the main goal set out here implies that countries should reach a budgetary position ‘close to balance or in surplus’. This would mean that the automatic stabilizers would be allowed to play fully and symmetrically over the business cycle and at the same time not breach the 3 per cent deficit criterion of the Maastricht Treaty. By following this strategy, it is argued, cyclical volatility could be significantly reduced because automatic stabilizers are – by definition – anticyclical. However, the operation of automatic stabilizers is not only propagated at European policy levels (such as the European Commission); official documents of other international institutions such as the OECD or the IMF also recommend their full operation (see for example OECD, 2001 and Heller, 2002). Apparently, there seems to be a general consensus that automatic stabilizers are effective. To our mind, however, the hypothesis of the effectiveness of automatic stabilizers is all but obvious. Rather several questions arise. First of all: which effect do we expect fiscal stabilizers to have on the economy? According to...

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