Fiscal Devaluation, Product Market Regulations and Eu Economic Activity

Abstract: In the aftermath of the global financial crisis, a fiscal devaluation, understood as a shift in taxation from labor to consumption and deregulation in upstream service sectors, have been debated as possible tools of restoring competitiveness in peripheral countries of the Euro area. The relevant empirical evidence of the effects of these two measures in the EU countries is however very limited. Our study tries to fill this gap. We explore an impact of fiscal devaluation and regulation in upstream service sectors on sector-level economic activity in the EU countries in years 1995-2015. Our results indicate that fiscal devaluation boosts export performance, gross value added, gross fixed capital formation, employment as well as it contributes to lower growth of compensation per employee. We found that the higher share of labour costs in total production costs, the larger magnitude of the favourable effects induced by FD. We also found that generous unemployment benefits decrease the effects of FD and that these effects are on average stronger in euro area countries than among non-euro EU member states. Furthermore, we confirmed that stringent regulations of up-stream services hamper the magnitude of the effects triggered by FD. The results provide profound implications for economic policy.