Fiscal Adjustment Research Articles

Greece's Sovereign Debt Past, Present and Future

The Greek debt restructuring of 2012 holds a historic place in the world, for more than one reasons, positive, but also negative. During the PSI securities totaling €199.2bn participated or 96.9% of the securities that were eligible and led to short-term EFSF bonds issuance worth €29.7bn and new long-term bonds worth € 62.4bn. As a result Greek sovereign debt decreased by €107bn or about 52%. In this context, the PSI reorganization of 2012 was largely organized and executed, successfully. However and this is openly acknowledged, it was a reorganization that took place after a considerable delay (in response to the Greek crisis) and with limited range, which in fact questioned if it could definitively resolve the issue of Greek debt sustainability for good. But such a criticism implies that indeed the reorganization of 2012 was designed as an answer to the sustainability problem in its entirety, which it seems that it was not the intention. On the other hand, another point of criticism is that if the reorganization had been selected to be executed earlier, certainly not during the prohibited - for reasons that are not for the present article - 2010, but perhaps in mid-2011, stopping the vicious cycle of repayment of the bonds at face value, it would had achieved additional fiscal goals. It is therefore obvious that the momentum of a reorganization, affects not only the will of the parties to participate in such a transaction and affects not only the success of such a venture, but has also other side effects which should be treated as equally important.Given the projected financing needs of the Greek State and the financing gap Greece is expected to face up until mid-2018, it is certain that a new intervention - of whatever nature - will be inevitable. Based on the 2010-2015 experience and lessons learned prior, during and post PSI the only certainty is that a possible future restructuring of the Greek sovereign debt, as extensive and deep, will be unavoidable. However such a restructure, which it would be best & final, will not relieve the Greek economy from the torment of the necessary fiscal adjustment, nor will undo the dependency of the Greek State Budget from the economic support of the Member-States and possibly the IMF or its institutional successor, at least for a sufficient transitional period. However, it will be a milestone for the future course of the Greek economy, as it will give room and will enable utilization of the today finite State funds for other purposes, against for example the Greek sovereign debt endless maturing repayments, in order to restart the economy, which is the stake at hand.

How to Destroy a Country. The Economics and the Politics of the Greek Crisis

The economic future of Europe, with its obvious implications for the world economy, depends on the combination of many processes, not only strictly economic ones. Currently, the situation is becoming quite complicated, with a number of particularly adverse tendencies overlapping and mutually strengthening one another. Adding to the classical problems involving the economic slowdown, high unemployment rate and insufficient innovation of the European economy, which weakens its global competitiveness, is the immigration crisis, the escalating terrorist threat and Brexit, which is already becoming a fact, as well as the risk of Grexit. The latter is not yet unavoidable, but still possible. The potential overlapping of Brexit and Grexit could be fatal for European integration. Solving the Greek syndrome requires a radical change in the way the European Union, especially Germany, approaches this problem. On the one hand, specific structural reforms and fiscal adjustments are necessary in Greece, but on the other hand there’s a necessity for a conditional reduction of the Greek public debt by half. What is needed in the long run, is to ensure, by systemic changes and supranationally coordinated policy, that some countries’ surpluses are not financed with others’ deficits and debts.

Are Expenditure Cuts the Only Effective Way to Achieve Successful Fiscal Adjustment

We re-examine whether successful fiscal adjustments are characterized by spending cuts. We apply the Bai & Perron structural break filter instead of ad hoc rules to identify fiscal adjustments in 20 OECD countries. Our estimates using conditional fixed effects logit models suggest that we cannot reject the hypothesis that the change in expenditures is equal to the change in revenues in successful fiscal adjustments. Most political-economy variables considered are not robustly related to successful fiscal adjustments. However, we find evidence that the political fragmentation of government affects the likelihood to observe a successful fiscal adjustment.

A vulnerabilidade social em tempos de acumulação flexível: uma contribuição para o debate no campo socioambiental

A noção de vulnerabilidade tem sido utilizada em diversos campos do conhecimento. Um de seus usos se faz nas pesquisas interdisciplinares sobre a vulnerabilidade socioambiental, que é entendida de forma simplificada como a sobreposição de situações de vulnerabilidade social e riscos ambientais. Identificou-se que o debate, no campo ambiental, tem sido dominado por perspectivas das ciências sociais de caráter individualista e funcionalista, com pouca abertura para leituras críticas. De forma a contribuir para a ampliação desse debate, busca-se nesse artigo apresentar uma discussão teórica acerca da noção de vulnerabilidade social. Argumenta-se que, em que pese ser utilizada por distintas vertentes e orientações teóricas e ideo-políticas, seu uso dominante se estabeleceu dentro do pensamento liberal revisitado. Essa hegemonia está em consonância com as transformações societárias ocorridas desde a década de 1970, com a crise do regime de acumulação fordista e a emergência do regime de acumulação flexível. Neste, uma nova gramática social para tratar dos temas relativos à pobreza, à desigualdade e à injustiça social toma forma, na qual se destaca uma abordagem da vulnerabilidade baseada nos ativos e nas capacidades, focada nos indivíduos e nas suas carências, respondendo a demandas de ajuste fiscal do Estado e corte nos gastos públicos. Como alternativa, dá-se ênfase a uma abordagem processual, focada nos direitos e na proteção e na exposição desigual aos riscos e suas causas econômicas e políticas.

The growth impact of discretionary fiscal policy measures

This paper looks at the impact of discretionary fiscal policy on economic growth for a sample of 18 EU countries over the period 1998–2011. The main novelty of this paper is the use, on the revenue side, of a dataset of fiscal measures based on the yield of actual legislative and budgetary measures, rather than approximations, such as changes in cyclically-adjusted variables. Using static and dynamic panel data techniques, we find that fiscal consolidation generally has a negative impact on growth in the short run, although some specific budget categories are not found to be statistically significant. In general, expenditure-based measures are found to have a slightly lower detrimental effect on growth compared to revenue measures, although the difference is not statistically significant. Among expenditure cuts, reductions in government investment and consumption are found to be growth reducing. Among revenues, indirect tax increases are found to have a particularly strong negative impact. Dynamic specifications suggest that consolidation reduces growth mainly in the year of fiscal adjustment, while future growth rates are affected only through the usual time persistence. Non-linear specifications indicate that spreading out consolidation may reduce the negative impact on growth slightly, and there is weak evidence that this is especially the case for revenue-based adjustment.

Who's Coming to the Rescue? Revenue-Sharing Slumps and Implicit Bailouts During the Great Recession

This paper analyzes the distribution of discretionary transfers from higher tiers of government in the process of fiscal adjustment in local jurisdictions which were hit by a negative revenue shock in formula transfers. Spanish local governments experienced a 30% fall in their revenue-sharing revenues at the beginning of the Great Recession. We use a ‘difference-in-discontinuities’ design to identify the causal effect of that shock on the amount of discretionary grants provided by three higher tiers of government (i.e., central, regional, and provincial) and on other budget items (i.e., spending and taxation). We identify these effects using an exogenous variation in formula transfers, as the losses during the crisis of municipalities above the 5,000 population threshold were greater than the losses of those below this threshold. We find that, on average, municipalities above and below the 5,000 inhabitant threshold did not differentially adjust their budgets during the crisis. Rather, we find that for the most indebted municipalities, a substantial share of the shock was absorbed by discretionary grants provided by regional and provincial governments.

Bargained haircuts and debt policy implications

We extend the Cole and Kehoe model (J Int Econ 41:309–330, 1996) by adding a Rubinstein bargaining game between creditors and debtor country to determine the share of debt repayment in a sovereign debt crisis. Ex-post, the possibility of partial repayment avoids the costly case of total default, as seen recently in Greece. Ex-ante, the effects are to increase the sovereign debt cap and delay the fiscal adjustment. In other words, expectations of a haircut in times of crisis relax leverage restrictions implied by financial markets and make government more lenient, suggesting caution with haircut adoption, especially when risk-free interest rates are low.

The Long-Run Effect of Fiscal Consolidation on Economic Growth: Evidence from Quantitative Case Studies

We contribute to the literature on the long-run effect of fiscal consolidation on economic growth by applying a novel method for quantitative case studies. Relying on a qualitative (narrative) definition of fiscal consolidations based on an examination of historical policy documents and using the synthetic control method (SCM), we investigate the evolution of post-consolidation trajectories of economic growth in six case studies of OECD countries. In contrast to recent studies that reject the hypothesis of non-Keynesian effects, our results do not offer clear-cut evidence on the long-run effect of fiscal consolidation on economic growth. Half of the case studies point to a positive effect with the other half indicating a negative effect. We further do not find a specific effect of the strength of the fiscal adjustment and the type of consolidation, i.e., whether the consolidation is rather based on expenditure cuts or revenue increases.

Greek Sovereign Debt Crisis: Causes, Fiscal Adjustment Programs and Lessons for Croatia

Greek Sovereign Debt Crisis: Causes, Fiscal Adjustment Programs and Lessons for Croatia

Greek Sovereign Debt Crisis: Causes, Fiscal Adjustment Programs and Lessons for Croatia

This paper investigates the factors that have led to the Greek sovereign debt crisis in order to derive policy lessons for Croatia and other highly indebted countries. In the first years after euro adoption, it seemed that membership in the monetary union facilitated a catching-up process for Greece, given that it enjoyed high growth rates and a rapid convergence of per capita income. However, the global crisis has revealed that the previous economic expansion was an unsustainable process based on excessive inflow of debt-creating foreign capital. In this paper, it is argued that the government sector contributed the most to the rising vulnerability of the Greek economy. Data are presented showing that extensive government borrowing was the main factor behind the rapid accumulation of Greece's external debt, which made it highly vulnerable to external shocks. Besides the procyclical fiscal policy, some other factors also contributed to the overheating of economic activity in Greece. Hence, this paper reviews the literature that deals with the compression of peripheral countries' sovereign bond yields after the creation of the monetary union, the doubtful suitability of the ECB's expansionary policy stance from the perspective of then booming peripheral states, and the institutional shortcomings of the EMU. The main motivation of this paper is to identify the key roots of the Greek debt crisis in order to derive lessons for policy-makers in Croatia. Since the beginning of the recession in 2008, Croatia has seen a significant deterioration in fiscal fundamentals, with high public debt becoming the main source of macroeconomic vulnerability. Reducing the debt-to-GDP ratio has emerged as a key policy challenge that needs to be addressed in order to reduce the likelihood of a debt crisis.

Macroeconomic adjustment programmes in the euro area: an overall assessment

Since the start of EMU (Economic and Monetary Union), the euro area, and more broadly the global economy, experienced an unprecedented credit boom. The expansion of credit was particularly strong in Greece, Ireland, Portugal and Cyprus and all of them subsequently needed official financial support. In each of the four programmes, financial assistance has been provided and promised against the commitment of each country to fulfil certain economic policy conditions contained in the macroeconomic adjustment programme. In general, a macroeconomic adjustment is a process driven by policies but also by changes in private spending behaviour (consumption, imports, investment) and improvement in competitiveness that countries are required to undertake after a large shock. In the case of the four countries, the shock emerged as a consequence of an excessive accumulation of imbalances in different parts of the economy: in the public sector in Greece, in the housing and banking sectors in Ireland, external imbalances in Portugal and in the banking sector in Cyprus. The paper looks at the feasibility of the fiscal adjustment comparing the macroeconomic conditions in the four countries and emphasising the role of the fiscal multipliers in the process. It also assesses the fall in the output in a comparative framework, stressing the role played by the different components of demand either in amplifying the effect of the fiscal consolidation or in offsetting it. In addition, it considers formulation of the programmes as well as their implementation with most attention devoted to reforms aiming at improving competitiveness, growth and employment in the framework of a cross-country approach.

Debt Brakes in the German States: Governments’ Rhetoric and Actions

Abstract In 2009, a new law on German debt brakes was passed: state governments are not allowed to run structural deficits after 2020. Consolidation strategies initiated between 2009 and 2020 influence if a state can comply with the debt brake in 2020. We describe to what extent government ideology predicts if state governments consolidate budgets and which fiscal adjustment path they choose. Attitudes toward budget consolidation, as expressed by politicians’ rhetoric in the public debate, differed among parties. Anecdotal evidence and descriptive statistics indicate that leftwing governments ran on average higher structural deficits than rightwing governments between 2010 and 2014. Primary deficits, however, hardly differed under leftwing and rightwing governments. Revenues of federal taxes were much higher than expected and facilitated budget consolidation. Leftwing governments did not need to run deficits to design generous budgets. It is conceivable that parties confirmed their identity by using expressive rhetoric, but responded to shifts in public opinion after the financial crisis and pursued more sustainable fiscal policies when in office.

Fiscal policy and private investment in Greece

This paper investigates the effects of fiscal policy on private non-residential investment and output in Greece. Besides examining the direct effects of fiscal consolidation, we investigate the role of financial markets and economic sentiment in the transmission of fiscal policy shocks. A tax based fiscal consolidation has more pronounced and more protracted negative effects on output and private non-residential investment relative to an expenditure based fiscal consolidation. A government spending-based fiscal consolidation improves financial markets and boosts economic sentiment. This in turn mitigates the direct negative effects of fiscal consolidation on private investment and output leading to a more rapid recovery. On the other hand, a tax hike fails to induce this positive confidence effect magnifying the negative effects of fiscal adjustment.

On the Predictability of Narrative Fiscal Adjustments

This paper shows that spending-based adjustments identified by DeVries et al. (2011) can be predicted on the basis of past output growth and other macroeconomic variables. Moreover, their contractionary effects vanish once we account for this source of endogeneity while tax-based consolidations remain contractionary.

On the predictability of narrative fiscal adjustments

This paper shows that spending-based adjustments identified by DeVries et al. (2011) can be predicted on the basis of past output growth and other macroeconomic variables. Moreover, their contractionary effects vanish once we account for this source of endogeneity while tax-based consolidations remain contractionary.

Fiscal policies in EMU countries: strategies and empirical evidence

Purpose The aim of the paper is to evaluate fiscal adjustments that have occurred in the Economic and Monetary Union (EMU) countries in the last 35 years, and their consequences on the economic growth process by using the mean group (MG) estimators. Design/methodology/approach Our emphasis is on the effects of different composition of fiscal stimuli and consolidations. We compare the effects on the economic growth rate of different compositions of major fiscal changes. We use a cyclically adjusted value of the fiscal variables to leave aside variations of the fiscal variables induced by business cycle fluctuations. Findings Our empirical research of the effects of large changes in fiscal policy, both in case of a fiscal consolidation and of fiscal stimulus in the 18 EMU countries from 1980 to 2015, shows that adjustments by cutting current expenditures, rather than by tax increases are more likely to boost economic growth. It also shows that cuts of investment expenditures may reduce GDP growth. During fiscal stimulus episodes, tax cuts and public investments are more likely to increase growth than current public expenditure. Originality/value This is the first study devoted to the EMU countries. It should be underlined that the results obtained as for EMU countries are not necessarily applicable to other countries, as the different government size as well as different market institutions may influence the results.

The politics of external approval: Explaining the IMF's evaluation of austerity programmes

During the European debt crisis, numerous states launched austerity programmes. The International Monetary Fund (IMF) evaluates and forecasts the likelihood of member states’ success in implementing these programmes. Although IMF evaluations influence country risk perceptions on capital markets, little is known about their reasoning. This article uses fuzzy-set qualitative comparative analysis (fsQCA) to explore on what grounds the IMF evaluated the success prospects of austerity programmes during the European debt crisis. Results reveal that IMF evaluations are heavily influenced by the programme's implementation credibility. They require a tractable policy problem, a country's institutional capacity to structure implementation, and favour expenditure reduction over revenue measures. By acting as a strict guide on the road to fiscal adjustment, the IMF indirectly influences member states’ scope of policy making through its surveillance activities. Extensive austerity programmes that need to be implemented swiftly are evaluated negatively if the country is not involved in an IMF programme.

Debt and austerity: Post-crisis lessons from Ireland

The Irish economy's heavy pre-crisis dependence on a credit-fuelled property price and construction bubble meant that it suffered more financial instability than most countries in the downturn 2008–2012 with the failure of the bulk of the banking system, heavy official and private debt and a severe employment decline. Faced with a sudden stop of international market funding, the Irish government had recourse to an EU-IMF financial support programme at the end of 2010. Reviewing the broad parameters of the programme this paper argues that, while a sharp fiscal adjustment was necessary, adverse distributional consequences were partly mitigated by government. But the programme should have embodied better international risk-sharing through financial engineering. Ireland's experience in financial crisis management and crisis resolution points to the importance of building and maintaining trust.

Cyclical Asymmetry in State Fiscal Policy: Is It Biased Toward Big or Small Government?

Recent research has shown that fluctuations in revenue availability over the business cycle cause the adoption of fiscal policy that amplifies economic cycles. Building on theoretical models that address the political economy of fiscal expansions and adjustments and the fiscal policy preferences of voters and policymakers, this article examines whether those procyclical effects are symmetric between boom and recession. The analysis reveals that the procyclical effects of cyclical revenue increases (in upturn years) on expenditures are smaller than those of cyclical revenue decreases (in downturn years), whereas the procyclical effects of cyclical revenue increases on tax rates are larger than those of cyclical revenue decreases. That is, policymakers prefer tax cuts to spending increases in pursuing expansionary fiscal policy during booms and spending cuts to tax increases in making fiscal adjustments during recessions. Taken together, the results suggest that cyclical fluctuations in revenue availability have procyclical effects on state fiscal policies in a manner that is asymmetric between boom and recession and fiscally conservative.

Austerity and niche parties: The electoral consequences of fiscal reforms

Austerity policies — policies of sharp reductions of a government's budget deficint involving spending cuts and tax increases — are claimed to boost support for radical political parties. We argue, counter to popular claims, that austerity measures actually reduce support for radical and niche parties. Austerity policies force traditional left-right politics to the forefront of political debate with the traditional mainstream parties having a stronger ownership over those issues. We systematically explore the impact of austerity measures on the electoral fortunes of niche parties in 16 developed countries over a 35-year period, while controlling for a number of socio-economic variables. We find that austerity policies that rely on tax increases affect radical parties on the left and the right in different ways than fiscal adjustments based on spending cuts.