Bringing macroeconomics back into the political economy of reform: the Lisbon Agenda and the ‘fiscal philosophy’ of EMU

Abstract:

The Lisbon Strategy supports reform of Member States' tax-benefit systems while the ‘fiscal philosophy’ of the EMU postulates that governments should allow only automatic stabilizers, built into tax-benefit systems, to smooth aggregate income. We ask whether these two pillars of EU economic governance are compatible. By exploring how structural reforms affect fiscal stabilization, we complement a political economy literature that asks whether fiscal consolidation fosters or hinders structural reforms. Using EUROMOD, a tax-benefit model for the EU-15, we identify the connections between specific tax and benefit reforms and the size of the stabilizers. We conclude that Lisbon-type reforms may worsen the stabilizing capacity of tax-benefit systems.