Real time analysis of euro area fiscal policies: Adjustment to the crisis

Using real time data from the OECD and fiscal policy reaction functions, this study explores discretionary fiscal policies in the euro area countries since the late 1990s. Both planned policies for the budget years and policy changes during budget implementation stages are investigated. The main focus is on the fiscal adjustment to the recent economic crisis. The results suggest that during the time of monetary union (EMU) euro area planned fiscal policies have been long-term oriented and counter-cyclical, and in the implementation stages policies have responded to unexpected economic developments. The crisis had a clear impact on discretionary policies. Due to increased uncertainty, the crisis spotlighted the impact of cyclical developments on fiscal planning. In the implementation stages, huge forecast errors in connection with planned policy were observed. As a consequence, fiscal plans were updated in order to alleviate the negative impacts of the crisis on euro area economies.