Bringing macroeconomics back into the political economy of reform: the Lisbon Agenda and the ‘fiscal philosophy’ of EMU

Summary

The Lisbon Strategy supports reform of Member States' tax-benefit
systems while the ‘fiscal philosophy’ of the EMU postulates that
governments should allow only automatic stabilizers, built into
tax-benefit systems, to smooth aggregate income. We ask whether these
two pillars of EU economic governance are compatible. By exploring how
structural reforms affect fiscal stabilization, we complement a
political economy literature that asks whether fiscal consolidation
fosters or hinders structural reforms. Using EUROMOD, a tax-benefit
model for the EU-15, we identify the connections between specific tax
and benefit reforms and the size of the stabilizers. We conclude that
Lisbon-type reforms may worsen the stabilizing capacity of tax-benefit
systems.