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Even though they are related, the size of automatic fiscal stabilisers should be distinguished from their effectiveness in terms of their impact on reducing fluctuations in economic activity. Box 1 shows that this assessment is also broadly confirmed by other comparable estimates. Estimates made by the European System of Central Banks (ESCB), as presented in Section 3, suggest that automatic fiscal stabilisers are generally sizeable but vary significantly across euro area countries. While the concept is well-established in macroeconomics, the term вЂњautomatic fiscal stabilisersвЂќ is not used entirely consistently in the literature and may refer to somewhat different concepts, which are presented in Section 2. This article examines automatic fiscal stabilisers in the euro area and their ability to provide economic stabilisation during the COVID-19 crisis. Furthermore, these do not suffer some of the same drawbacks as discretionary fiscal measures, such as the need for measurement of the economic cycle or implementation lags. In principle, automatic stabilisers have the advantage of being timely, targeted and temporary in smoothing the economic cycle. Together with discretionary fiscal policy measures, these are especially important in a currency union such as Economic and Monetary Union (EMU), where вЂ“ alongside the common monetary policy вЂ“ instruments are needed that address idiosyncratic, country-specific shocks. Automatic fiscal stabilisers refer to elements, built into government revenues and expenditures, that reduce fluctuations in economic activity without the need for discretionary government actions. In addition to these discretionary measures, automatic fiscal stabilisers in the euro area countries play an important role in cushioning the economic shock caused by the pandemic. When implemented, the EU budget will temporarily almost double in size to around 2% of GDP. Furthermore, leaders at the European level have agreed on a major recovery plan embedded in the EU budget. As of end-May 2020, the discretionary fiscal measures by themselves amounted to about 3.25% of GDP at the aggregate euro area level. At the same time, euro area governments implemented sizeable packages of fiscal measures, consisting, in particular, of discretionary fiscal stimulus measures.

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The ECB committed to using the full potential of the monetary policy tools at its disposal within its mandate.

1 IntroductionДЄuthorities in the euro area have taken exceptional policy action to stem the economic fallout from the coronavirus (COVID-19) pandemic. Published as part of the ECB Economic Bulletin, Issue 6/2020.

Prepared by Othman Bouabdallah, Cristina Checherita-Westphal, Maximilian Freier, Carolin Nerlich and Kamila SЕ‚awiЕ„ska Automatic fiscal stabilisers in the euro area and the COVID-19 crisis

Automatic stabilizers refer to