In an effort to reduce their sizeable debt burdens, many Western European countries have been undergoing extensive fiscal consolidation. Finding the correct balance between maintaining growth, efficiency and credibility in the financial markets (in light of the situation in Greece, for example) has become highly critical. Excessive adjustments carried out too quickly can have harshly detrimental effects on unemployment and economic growth, jeopardizing the whole point of fiscal lightening in the first place. However, insufficient modifications will always prove ineffective. Authors Javier Andrés and Rafael Doménech of BBVA Research focus on Spain and analyse its fiscal consolidation programme. They examine the relationship between the structural budget balance and unemployment, from pre-crisis levels to the current recessionary environment.
This article was featured in a recent issue of Current Economics. You can download a sample at www.consensuseconomics.com.