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External Competitiveness and the Role of Fiscal Policy: Does fiscal austerity matter?

During and after the sovereign debt crisis that hit most of the EU member states after the Great Recession the question of the effectiveness of fiscal policy vis-à-vis ensuring sustainable growth rates and changing the economic structure of member states has been highly debated. Accordingly, this paper investigates the effects of shocks in government purchases and net taxes on the export competitiveness of the 11 new EU member states: Bulgaria, Czech Republic, Estonia, Croatia, Latvia, Lithuania, Hungary, Poland, Romania, Slovenia and Slovakia. The countries are treated as a homogenous sample, but the empirical analysis extends beyond this. Namely, the paper examines two subsamples based on the exchange rate regimes of the 11 new EU member states: the fixed vs flexible exchange rate regime. By applying panel VAR analysis, over 1999-2015 period, we report following conclusions. First, fiscal austerity influences the level of exports in our sample. Second, the effects of shocks in fiscal policy on the level of exports are short-lived. Third, shocks in government purchases are the most important determinant in the total and in the fixed exchange rate countries sample. And fourth, shocks in net taxes influence the level of export only in the countries that have the flexible exchange rate regimes. Our results contribute to the literature that examines the effects of fiscal policy on the competitiveness of national economies by highlighting both the duration effect of fiscal policy on the level of export and also by pointing to the optimal economic instrument used with respect to the currency arrangement of the country.

external competitiveness, new EU member states, fiscal consolidation, panel data analysis, export

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