Fiscal devaluation: An empirical analysis on the Eurozone

The fiscal devaluation, historical and theoretical foundations date back to Keynes but present meaning and function arose from the structural characteristics and economic challenges of the European Union (EU) countries, is a unconventional fiscal policy application in which the reduction in employer social security contributions is simultaneously by an increase in value-added tax (VAT) rate. This policy is in fact the result of the restriction that Eurozone countries transfer their monetary policy powers to the European Central Bank rather than the economic troubles they are experiencing, and therefore cannot resort to nominal devaluation. As a result of this constraint, the objective of improving the foreign trade balance achieved by nominal devaluation is to be replicated by the tax swap proposed fiscal devaluation. Thus, theoretically, the decrease in employer social security contributions gives export goods a competitive advantage by reducing unit costs, while the increase in VAT discourages imports as a result of increasing the relative prices of imported goods. Thereby achieving similar effects to nominal devaluation the foreign trade balance. In addition, there are arguments in the theoretical and empirical literature that the fiscal devaluation not only improves the foreign trade balance but also supports fiscal consolidation efforts without disturbing the budget balance and increases employment and growth. In this study, it is tested how the fiscal devaluation affects the net export level in the short and long run with the dynamic panel data analysis in the period covering the years 1995-2018 for the Eurozone countries. According to results, fiscal devaluation in line with the theoretical expectation positively affects the net exports in the short and long term.