Latest ESRI research critiques European fiscal policy during the international financial crisis.

• Since 2010, the absence of a fiscal stimulus at a European level has exacerbated both the fiscal and growth difficulties experienced by member states.
• This is particularly the case in terms of the key fiscal indicator - the debt to GDP ratio.
• While Ireland had no choice post 2007 but to correct its fiscal accounts, the negative consequences of austerity on Irish economic activity could have been ameliorated by an expansionary European fiscal response. 

In a research note released with the Quarterly Economic Commentary (QEC), Dr Kieran McQuinn (ESRI) assesses the performance of European fiscal policy during the international financial crisis. Dr McQuinn notes that since 2010 European fiscal policy has been decidedly pro-cyclical. As a result, the austerity type budgetary policies adopted across Europe have impeded growth prospects and exacerbated the heightened levels of debt to GDP observed across many European countries, with Greece being the extreme case.
Irish economic performance post 2007/08 is also discussed in the context of the austerity debate.  In light of the fall-out from the financial crisis, the note discusses the role an expansionary European fiscal policy could have played in supporting the Irish recovery over that period.

Also in the Note, the policy issues concerning the future conduct of European fiscal policy are identified. These include domestic policymakers addressing any European institutional issues which prevent the formation of an effective fiscal union within the euro area.

Commenting on the Note, Dr McQuinn said ”It is important to highlight the economic rationale or lack thereof which has underpinned the fiscal response of European authorities to date. As a number of commentators have pointed out, the relentless pursuit of austerity at a time of contracting economic activity is not part of traditional mainstream economic policy thinking.“

For further information please contact:

Kieran McQuinn, Associate Research Professor, The Economic and Social Research Institute 

Email: kieran.mcquinn@esri.ie