The effects of European fiscal discipline measures on current account balances

• Published in: International economics and economic policy Vol. 21; no. 1; pp. 251 - 283
• Main Authors: Glebocki Keefe, Helena, Hepp, Ralf
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01.02.2024; Springer Nature B.V
• Subjects: Budget deficits; Current accounts; Economic crisis; Economic Policy; Economics; Economics and Finance; Fiscal policy; GDP; Gross Domestic Product; International Economics; Macroeconomics/Monetary Economics//Financial Economics; Original Paper; Public debt; Public Finance; Treaties; E62; Current account balance; E61; F32; European fiscal stability treaty; F36; Synthetic control method; Fiscal policy coordination
• ISSN: 1612-4804; 1612-4812
• DOI: 10.1007/s10368-024-00587-y

Following the European Debt Crisis, there was a significant push for greater fiscal discipline across the EU member states. This began with the revitalization of the Stability and Growth Pact in 2011 and continued with the adoption of the Fiscal Stability Treaty of 2013. The measures were designed to maintain or achieve both government debt-to-GDP ratios of below 60% and government budget deficits of below 3%. This paper investigates whether the fiscal discipline measures had an impact on the relationship between fiscal and current account balances. Using the synthetic control method, we examine current account balances in each EU member state that implemented the fiscal provisions in the treaty (Title III), compared to a synthetic counterfactual economy. We find that countries most impacted by the European Debt Crisis experienced the greatest improvement in their current account deficits from the fiscal discipline measures. Several other EU member states also experienced stabilization in their current account balances compared to their synthetic counterfactuals.