EU Fiscal Consolidation After the Financial Crisis: Lessons from Past Experiences

The global financial crisis has led to a sharp deterioration of EU countries' public finances. Views are split regarding the most appropriate consolidation strategy to follow, in particular considering: the timing of fiscal consolidation in relation to the path of economic recovery reflecting (a) the trade-off between consolidation and stabilisation; (b) fiscal consolidation in the context of a distressed banking system where the credit channel is hampered and without which economic recovery can hardly take place, (c) the absence of exchange rate adjustment in the euro area which could make it more difficult for countries with competitiveness problems to achieve successful fiscal consolidation. The existing literature on fiscal consolidations provides only partial evidence on these issues. In this paper we set out to investigate these questions by drawing on EU (and non-EU OECD) experiences during the period 1970-2008.