Georgios KARRAS
Department of Economics, University of Illinois at Chicago,
601 S. Morgan St., Chicago, IL 60607 7121
gkarras@uic.edu
Abstract
The introduction of the euro has been followed by noticeable fiscal divergence between the core and the periphery economies. This paper investigates the basic properties of fiscal policy in Europe and asks whether these properties are affected by euro membership. The empirical findings suggest that fiscal policy has been decisively countercyclical and generally sustainable. Adopting the euro raises the average country member’s primary deficit by about 0.5% of GDP within a year and the effect accumulates to 1.76% of GDP ten years later, but these dynamic responses are far more pronounced in the periphery economies than in the core.