Does Politics Matter? A Comparative assessment of discretionary fiscal policies in the Euro Area

When using discretionary fiscal policies in the countries belonging to the European Union, any change affecting the current fiscal stance must run into the boundary designed by fiscal rules. This would imply that discretionary fiscal policies - being mainly driven by the need to comply with fiscal rules - might be scarcely affected by politics and the political characteristics of a country. We empirically test this hypothesis on a sample of 19 European countries observed over years 1995–2019. Using different econometric techniques and alternative specifications, we find a strong and robust fiscal pro-cyclicality. More importantly, the pro-cyclicality of the fiscal pol- icy is not significantly affected neither by the behaviour of macroeconomic fundamentals nor by institutional and political variables. From a policy viewpoint, it seems that the mechanisms in- troduced to guarantee fiscal sustainability in the euro area can overcome all possible political in- fluences on both the size and the sign of implementable fiscal policies. This would suggest that politics does not matter to shape the public budget, at least not so much as the fiscal rules.