Fiscal Consolidation in Eurozone Countries

Fiscal consolidation episodes can be implemented either through increases in government revenues or reduction in public expenditure. Fiscal consolidation has an important role in macroeconomic stabilization as it can reduce budgetary pressures and improve fiscal sustainability. We will study in this paper several fiscal consolidation episodes in EZ countries, implemented as a reaction to a severe economic contraction which resulted in important increases of public debts and deficits. Our results confirm the existence of significant differences between core and periphery EZ member states regarding fiscal adjustments. Fiscal space represents an important tool to cope with negative output shocks, which can produce significant increases in debt and deficits and reduce the scope for expansionary fiscal policies implemented in order to restore economic growth.