The Growth Effects of Fiscal Consolidation

Executive Summary

Fiscal consolidation is returning to the euro area. From 2025 to 2028, governments are required to adjust budgets under the reformed EU fiscal rules, with average planned consolidations of 1.9% of GDP. In Italy (4.3%), France (3.7%), Spain (3.6%) and Finland (4.8%), the adjustment requirements are historically large. These plans revive long-standing debates about the economic effects of consolidation on growth and debt sustainability.

The historical record points to contractionary effects. Evidence from past episodes in the euro area shows that fiscal consolidations have typically reduced output, with the most severe impact during the 2011–13 euro crisis. In several countries, debt ratios increased rather than fell as growth deteriorated.

Official projections may underestimate these risks. The EU’s current debt sustainability framework assumes constant fiscal multipliers of 0.75, rapid recovery, and no cross-country spillovers. Yet empirical evidence shows that multipliers often exceed 1 in downturns, negative effects can persist, and spillovers magnify costs.

The next adjustment cycle carries significant challenges. Planned consolidations in large member states such as Italy, France, and Spain are historically large. While designed to be more gradual and predictable than during the euro crisis, their economic and political risks remain considerable, especially if growth weakens.

Institutional reforms have improved resilience, but limits remain. Banking union, crisis mechanisms, and the ECB’s bond-buying instruments provide greater stability than a decade ago. Yet ECB interventions remain conditional on fiscal compliance, creating potential tensions between market stabilisation and fiscal discipline.

Core arguments

1. Fiscal consolidations can raise debt ratios when growth effects are underestimated. The new EU framework’s technical assumptions ignore context and multiplier variation.

2. Simultaneous tightening across member states amplifies costs. Cross-country spillovers magnify contraction and reduce cohesion.

3. Credibility requires flexibility, not uniformity. Debt sustainability depends on sustained growth, not mechanical deficit cuts.