Fiscal Consolidation and Support for the Common Currency

Abstract The existence of a common currency and further integration within the European Monetary Union crucially depends on public legitimacy. As a response to the Global Financial Crisis and subsequent Sovereign Bond crisis, several European governments have implemented fiscal consolidation policies in an attempt to restore investors' confidence. According to its critics, though, austerity has also weakened public confidence in the European Union and its most visible economic symbol, the euro. Unfortunately, the simultaneity of recessions and fiscal consolidation makes it hard to disentangle the two effects empirically. Does austerity really decrease public support for the euro, or are they both explained by the macroeconomy? In this paper, we attempt to solve this puzzle relying on a rich dataset of fiscal adjustments that are weakly exogenous to the business cycle. The statistical analysis of a panel of 19 European countries and Eurobarometer surveys conducted therein between 2004 and 2019 suggests that fiscal consolidation in general, and expenditure‐based fiscal consolidation more specifically, affected support for the Euro negatively but that this effect is modest. We also find that these effects are conditional on both individuals' self‐placement on the political spectrum and their employment status.