Stabilization policies and international trade: A comparative study for the core, periph and East Euro countries*

The economic crisis is not a good environment, and contributes to create difficulties when deciding how to finance the public deficit. In such a context, the scope of fiscal policies for stabilization purposes seems to be reduced. Moreover, the current account imbalances have amplified the effect of the actual economic and financial crisis in Europe and could impede recovery. In this paper, we will explore the impact of European stabilization policies on competitiveness, and to which extent fiscal consolidations could limit economic growth. Following a macroeconomic model using monetary and fiscal rules, we will perform an empirical application for three sets of European countries: the core, the peripheral, and the Eastern countries.

The first group, will be formed by five of the six founding states of the current European Union (EU), namely Belgium, France, Germany, Luxembourg and the Netherlands. Those countries, known as the core of the EU, have shown relatively sustainable macroeconomic results after the recent crisis. In the second set we will include Portugal, Ireland, Italy, Greece and Spain. Those member states of the Eurozone are of particular interest since they have been grouped, in Anglo jargon, as PIIGS due to high national budget deficits, rising government debt levels and major problems of competitiveness in the recent economic crisis. Finally, we will use data on the Central and Eastern European Countries (CEECs). Those countries, grouping the former socialist countries of Europe, experienced significant growth after their accession to the EU which led to a high potential for convergence with their Western EU partners but, sometimes, at the cost of unsustainable external positions. Recently, after the economic crisis some of them have recovered their external disequilibria, although the fiscal consolidation required for recovering would mean a brake on their process of growth and convergence.

This approach would allow us to evaluate the implications of different levels of government deficit and debt, on competitiveness and growth. The particular interest here is in discovering interactions among those member countries showing a relatively high level of public debt, and those that seem to follow a more strict fiscal discipline.