Fiscal Policy in the Eurozone: The Case of Spain

Topics: Tax, Public finance, Monetary policy Pages: 13 (3164 words) Published: December 2, 2013
Introduction to Macroeconomics

Fiscal Policy in the Eurozone
The Case of Spain
Carla M

Fiscal Policy in the Eurozone – The case of Spain

Index
Context
Fiscal Policy in the Eurozone ……………………………………………….…………………………. 2 The Role of the ECB ………………………………………………………………………….……………. 3

The Case of Spain
Spanish Tax System …………………………………………………………….…………………………. 4 Measures to deal with the crisis (2008 -2012) ………..……………………….……………. 4 Evolution of the collection of Taxes ……………………………………….………….. 7

Conclusion ……………………………………………………………..…………………………………….……. 8 Bibliography ……………………………..………………………………………………………………….….. 9

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Fiscal Policy in the Eurozone – The case of Spain

Fiscal Policy in the Eurozone
The Eurozone differs from other types of unions in some aspects. First of all, it doesn’t have a specific government to control the operations of the ECB or the fiscal policy. Fiscal policy in the euro area, unlike most monetary unions, doesn’t have a central authority to determine a specific way of action. This is a result of the denial of some of the members to delegate or transfer the decision power they have in terms of taxation or expenditure policies to an upper organism. It’s obvious that, as a result, differences between policies among countries would arise. That’s why Maastricht Treaty (signed in 1992) and the Stability and Growth Pact (signed in 1997) provided some performing guidelines.

Some of these guidelines that the different countries of the EMU (European Monetary Union) have to follow are:






Deficit held to 3% of their GDP. Exceeding this requirement would imply a fine between the 0.2 and the 0.5% of their GDP. In fact, these fines are only applied is the deficit is not corrected in a period of 2 years. Moreover, the fines are sometimes not applied if the Council declares the economy of the country under exceptional circumstances. This situation appears when the country is experiencing a huge recession or an important crisis is taking place due to external facts (natural disasters…). This measure was established in order to maintain balance in the medium term.

A maximum 60% of the gross debt-to-GDP ratio. This is one of the indicators of the status or health of an economy. It represents the total amount of debt of a country over the total value of its GDP. This measure wouldn’t be applied if the deficit excess were being reduced at a reasonable speed. However, it would be a decision of the Ecofin to decide to apply or not these penalties and to elaborate some recommendations for the governors of the country to solve the situation. Surveillance: The different countries also have to present a program containing some information about their policies (objectives to reach a determinate budget (medium term), their measures to achieve this goal, their expectations about the different economic perspectives such as employment, inflation, growth…)

One of the failures of the SGP (Stability and Growth Pact) is the fact that it doesn’t provide a mechanism or a way to achieve aggregate fiscal outcomes which are compatible with the monetary policy imposed by the ECB.

The Commission is considering some proposals to revise the SGP to include the effects of economic cycles and the ageing population.
At the present time, almost all countries in the Eurozone have gone through a reduction (fiscal contraction) to meet these requirements.
For some experts, a more flexible fiscal policy and a more strict monetary policy would have led to greater exchange rate stability for the Eurozone, providing that when the fiscal policy is so tight, the monetary authority is dominated by the imposed fiscal policy. Last Friday (2nd March), 25 of the countries of the EU signed a treaty which contained the following ideas or restrictions:



The Treaty was agreed on the 9th of January but it won’t be effective until the 1st of January of 2013.

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