FISCAL ADJUSTMENT AND ECONOMIC GROWTH IN THE EUROPEAN UNION

Abstract

The current world economic crisis induced countries to launch wide-scale
spending programmes all over the world. Member states of the European
Union have not been an exception to this trend. While deficit spending may
increase the aggregate demand, it can also accelerate indebtedness and make
the required spending cuts politically risky later on. However, deficit financing
is not a new phenomenon in the EU; it has been widely practiced in the last
couple of decades. As the crisis seems to come to an end, countries with huge
deficits should adopt exit strategies now, thereby reducing deficit and debt and
reintroducing fiscal discipline, a requirement laid down in the Stability and
Growth Pact. Nevertheless, former adjustment processes can provide ample
evidence for successful and politically viable fiscal consolidations. In certain
cases, even economic activity started to accelerate as a response to the welldesigned adjustment measures. Based on the previous experiences of EU
states, the aim of this paper is, therefore, to identify the conditions that may
determine a fiscal consolidation to be successful in terms of a reduced debt
ratio and a positive economic growth.