ZEW Study on the Stability and Growth Pact - Automatic Stabilisers Contribute More to Economic Consolidation in Euro Countries than in the U.S.

The recent financial and economic crisis has shown that the national budgets in the euro area absorb economic shocks to a larger extent than the US budget. Automatic stabilisers such as unemployment insurance, income taxes, and social insurance contributions play a crucial role in this context. Stabilising mechanisms help to cushion the impact of economic downturns in the eurozone. The European Stability and Growth Pact has no negative impact on automatic stabilisers. This is the result of a study conducted by the Mannheim Centre for European Economic Research (ZEW) on behalf of the German Federal Ministry of Finance.

Does Europe need more substantial fiscal integration? The debate about this issue is continuing unabated. Observers stress that high debt levels in the euro countries considerably constrain active fiscal policies. Against this backdrop, automatic stabilisers are essential instruments. While critics argue that the Stability and Growth Pact leaves indebted member states too little flexibility to stabilise the economy, the ZEW study shows: The automatic stabilisers in all 18 euro countries have largely contributed to consolidating the economy between 2007 and 2014. The Stability and Growth Pact had no negative impact on the automatic stabilisers.

"Automatic stabilisers contributed a lot to keeping the European economy going during the financial and economic crisis," says Andreas Peichl, head of the ZEW Research Group "International Distribution and Redistribution" and professor of quantitative public economics at the University of Mannheim. In practical terms: Without automatic stabilisers, the eurozone would have been hit much harder by the 2009 recession. "The eurozone gross domestic product would have dropped by up to 5.9 per cent instead of 4.4. per cent" Peichl states.

Moreover, the study shows that the automatic stabilisers of the euro countries are much more efficient than those of the US. Based on micro-data for all 18 euro area countries and the United States, ZEW researchers simulated different shock scenarios for the economies on both sides of the Atlantic. The scenarios draw on figures from the 2008/09 crisis and the historical average. The central finding (based on the state of legislation as of 2013): "Tax and transfer systems cushion 47 per cent of the shocks in the eurozone, but only 30 per cent in the US," Peichl explains. According to the analysis, a major part of this stabilisation gap between Europe and the US can be attributed to social security contributions and social benefits, which are significantly lower in North America.

Against the background of the ongoing debate on anti-cyclical mechanisms, the results of the ZEW study are of major relevance to Europe. The analysis shows that the national automatic stabilisers in the euro countries contribute notably more to economic consolidation than in other countries, for example the United States.

The study is available at

http://ftp.zew.de/pub/zew-docs/gutachten/ZEWAutomaticStabilizersEurozone2015.pdf

For further information please contact

Prof. Dr. Andreas Peichl, Phone +49 (0)621/1235-389, e-mail peichl@zew.de