The Fiscal Stimulus and Challenges Ahead: Views on the Euro Area

Focusing on the euro area, this article discusses recent fiscal developments and the use of discretionary fiscal policies to stimulate economic activity. It is argued that, when adopting discretionary stimulus measures, policy‐makers should take into account two factors: (i) ex ante fiscal plans and the perception of the state of the economy in “real‐time” may be substantially different from what is observed ex post, based on revised data; (ii) discretionary fiscal policies seem to have become less effective over time to stimulate output in the euro area, also because of a more forceful reaction of monetary policy to fiscal expansions. In the specific context of the 2008–2010 global crisis, while the implementation of fiscal stimulus measures probably averted an even more severe contraction of economic activity, this came at the cost of mounting fiscal imbalances. At the European level, the necessary fiscal adjustment will need to be complemented by a reform of the European Union’s system of fiscal rules.