Bringing Macroeconomics Back into the Political Economy of Reform: the Lisbon Agenda and the ‘Fiscal Philosophy’ of EMU*

Abstract

Abstract 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.

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