The Four Fiscal Worlds. How the EU Countries Balanced Income Equality and Economic Growth After the Euro Crisis.

Since the late 2010s, the Euro crisis has put the fiscal and redistributive policies of the EU member states under unprecedented pressures. Shrinking economies have curbed the revenues of the general government while increasing the demand for compulsory and non-compulsory social expenditure. On the one hand, the crisis has opened a window of opportunity for national governments to redesign their fiscal and redistributive policies for higher effectiveness and sustainability. This window of opportunity has also witnessed an increasing political interest in the idea of ‘Social Europe’, namely, social policy development at the EU level. On the other hand, institutional conditions and policy legacies have left governments with different room to maneuver. Where the external constraints commit governments to balance their budget, the dynamics of the crisis have trapped governments in the paradoxical need of pro-cyclical moves despite decreasing voters’ consensus. The trap would have been almost inescapable under weighty public debt and debt service. The paper investigates the strategies that governments have adopted to tackle the fiscal paradox initiated by the Euro crisis. In detail, it develops an original framework in which fiscal and redistributive policy mixes shape four ‘fiscal worlds’, each of them characterized by a special balance between income equality and economic growth. A fiscal policy mix biased toward regulation generates a not-equal/growing fiscal world and motivates low-income groups to mobilize for redistribution. If narrow-sighted policymakers react by implementing redistributive policies for short-term consumption, national economy moves toward the equal/not-growing fiscal world. If policymakers react through distributive policies, economic downturn matches with higher income inequality, leading to the not-equal/not-growing fiscal world. Only one fiscal world positively combines income equality and economic growth and asks farsighted policymakers to adopt redistributive policies for investments. To test this framework, the paper maps EU countries’ membership to the four fiscal worlds from 2007 to 2018 by developing a new set-theoretic indicator. Then, it identifies the constellations of fiscal policy tools that explain countries’ membership to a given fiscal world through QCA.