Are Fiscal Policies Countercyclical in the Euro Area?

We want to investigate whether the cyclical behaviour of fiscal policy has changed in the euro area countries since 1999, due to the EU framework of fiscal rules.  Specifically, have national fiscal policies been more countercyclical? To answer this question, we study the relationship between the change in the cyclically-adjusted primary balance and the change in the output gap. The former variable is taken as an indicator of discretionary fiscal policy. The latter is an indicator of cyclical conditions. We use panel data for the euro area and data for twelve euro area individual countries (and three EU countries and five OECD countries for comparison). The sample covers the period 1970-2008. We make some correlation analysis before estimating the relationship using an OLS estimation method (with country and time fixed effects for the model of the euro area). We show that fiscal policy was countercyclical in all euro area member countries in 2009. However, over the period 1970-2008, countercyclicality was little frequent in those countries to compare with other OECD countries. Moreover, since 1999, fiscal policies in the euro area have no longer been procyclical during good times, but they have been procyclical during bad times in two countries, Austria and Portugal.