An Assessment of Enhanced Competitiveness through Fiscal Devaluation

Abstract

The purpose of this paper is to determine whether fiscal devaluation can represent a solution for increased competitiveness, as one of the most important issues highlighted by the sovereign debt crises, which needs to be properly addressed, is low competitiveness of Southern Euro Area member states. These countries registered high internal and external imbalances that could not be reduced through monetary devaluation. Within this context, fiscal policy instruments represent the core elements for growth, competitiveness and stability. Although, especially during the last years, fiscal policy changes were implemented having as an important objective the decrease of budgetary deficits and public debts, the influence is much more significant. Taxation can also be used to resolve important issues as low competitiveness. In this respect, we determine the effects of fiscal devaluation on the current account balance by applying panel data analysis on data for all European Union member states, as the principle can be useful for all countries, and conclude on the use of fiscal devaluation as solution for enhancing competitiveness.