Fiscal Consolidations and Public Debt in Europe

The objective of this paper is to gain insights into the relationship between deficit-reducing policies and the evolution of the debt/GDP ratio. We consider past events of fiscal consolidation in a selected group of EU countries and check what is the associated change of the debt/GDP ratio both from a short and medium-term perspective. In the analysis, we also differentiate between tax-based and savings-based fiscal consolidations and the pre-Euro and Euro periods. Our results point towards a positive short-term effect, while the medium-term effect turns out to be negative. Savings-based fiscal consolidations result to be less negative on the DGR evolution than tax-based ones. The Euro’s introduction seems not to have altered substantially the relationship studied.