The Comparative Effects of Fiscal Policy in Small and Large European Countries

Abstract

The paper by Denis and Quinet addresses the concern that national fiscal policy may become less effective as integration within the Euro area progresses. In such a context, given the loss of a national monetary policy, fiscal policy needs to play a more significant role in smoothing the impact of country-specific shocks. The authors find no evidence that fiscal policy is less effective in small open economies. They argue that automatic stabilisers seem to be more powerful in these countries, as highlighted by a higher semi-elasticity of the public balance vis-a-vis GDP. They also note that the effectiveness of discretionary fiscal policy can be hampered by a high level of public debt and not by a higher propensity to import. Against the background of these results, Denis and Quinet suggest that one way of reconciling the correlation between country size and the fragility of public finances over the past decades is to argue that small open economies are more subject to external shocks and more prone to fiscal crises.