Asymmetry of External Effects of the Budget Balance of the Largest Eurozone Countries as an Obstacle to Fiscal Policy Coordination

Анотація

The paper analyses the external effects of the fiscal policy of the Eurozone and the two largest countries (Germany, France) vs the countries of the European frontier area. Based on the corresponding VAR-models with three variables (budget balance of the largest Eurozone countries, real exchange rate (RER), cyclical behaviour of GDP) according to quarterly data of 2002-2019 it was found that improvement of the budget balance of Eurozone countries in Central and Eastern Europe (CEE) leads to an increase in RER (this is a short-term effect at a floating exchange rate, for the countries with a fixed exchange rate -this is a quite long-term effect), while the response of relative prices to the Eurozone budget surplus is much weaker in Southern Europe (only in Spain there is an option of RER reduction). The price response to the improvement of the budget balance in Germany and France is quite diversified in terms of the countries studied. The impact on GDP changes is much more stable in terms of individual countries. The improvement in the budget balances of Germany, France and the Eurozone has a positive effect on the GDP cyclical changes in CEE countries (this may be a result of reduced business profitability in the countries initiating fiscal austerity policy and relocation of industrial enterprises to reduce production costs), while the contrary trends are typical for "problematic" countries of Southern Europe (Greece, Spain, Portugal). The relevant structure feature highlights the difficulties of coordinating fiscal policy within such a heterogeneous integration entity as the European Union, but at the same time emphasizes the need to harmonize fiscal decisions through respective institutional tools at the national and supranational levels. Among these tools could be the introduction of a fiscal policy rule that considers the external effects of the fiscal policy of the largest Eurozone countries. In combination with other institutional tools for adjusting fiscal policy, this should facilitate not only countercyclical stabilization policy but also several structure problems, commonly referred to as obstacles to the effective integration approach (low labour and capital fluidity, limited price and wage flexibility, insufficient efficiency of the stabilization function of both the common monetary policy of the Eurozone countries and the policy of flexible exchange rate introduction in other countries).

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