Is Lisbon Far from Maastricht? Trade-Offs and Complementarities between Fiscal Discipline and Structural Reforms

While according to the so-called lsquo;Brussels-Frankfurt consensus', sound fiscal policies and structural reforms support each other, it is often claimed that the EU fiscal framework, by reducing the budgetary room for manoeuvre and the political capital of governments, may deter reforms. The aim of this article is to explore which factors determine the relationship between fiscal discipline and reforms. By means of a simple model we show that, depending on the time horizon of the government, structural reforms may either be complementary to, or a substitute for, fiscal discipline. If governments are forward-looking, substitution is more likely; if governments are short-sighted, reforms and fiscal discipline may become complementary. We provide empirical evidence supporting this argument. In a sample of EU-15 countries over the past three decades, the introduction of the Maastricht constraints at the beginning of the 1990s does not seem to have affected the probability of labour market reforms on average, but had a positive and significant impact on countries with governments facing elections in the current or forthcoming year (which are hence assumed to behave myopically). Our results suggest that if governments are short-sighted, then the expectation that relaxing fiscal constraints may help to boost structural reforms may not be well-founded. (JEL codes: E62, H50, H55, H62, J58, L50)