Working Paper: CEPR ID: DP6204
Authors: Marco Buti; Werner Roeger; Alessandro Antonio Turrini
Abstract: While according to the so-called ?Brussels-Frankfurt consensus? sound fiscal policies and structural reforms support each other, it is often claimed that the EU fiscal framework, by reducing the budgetary room of manoeuvre and the political capital of governments, may deter reforms. The aim of this paper is to explore which factors determine the relation between fiscal discipline and reforms. By means of a simple model we show that, depending on the time horizon of the government, structural reforms may either be complement or substitute with fiscal discipline. If governments are forward-looking, substitution is more likely; if governments are short-sighted, reforms and fiscal discipline may become complement. We provide empirical evidence supporting this argument. In a sample of EU-15 countries over the past three decades, the introduction of the Maastricht constraints at the beginning of the 1990s does not seem to have affected the probability of labour market reforms on average, but had a positive and significant impact on countries with governments facing elections in the current or forthcoming year (which are hence assumed to behave myopically). Our results suggest that if governments are short-sighted, then the expectation that relaxing fiscal constraints may help to boost structural reforms may be ill-founded.
Keywords: economic effects of deficits; stability and growth pact; structural reforms
JEL Codes: E62; H50; H55; H62; J58; L50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Maastricht constraints (E62) | probability of labor market reforms (J48) |
| electoral cycle (K16) | probability of labor market reforms (J48) |
| tighter fiscal constraints (H60) | structural reform programs (E69) |
| myopic behavior (E71) | structural reform programs (E69) |
| relaxing fiscal constraints (E62) | structural reforms (E69) |