Members of a monetary union have limited control over monetary policy. This can elevate the role of fiscal policy as the primary macroeconomic tool against country-specific shocks. This paper shows that there is an additional channel of transmission of fiscal policy in countries within a union via consumer sentiments. Incorporating data for the European Economic and Monetary union in a VAR model, I provide evidence that the sentiments channel for fiscal policy is strongly present in certain European countries but the effect is heterogeneous across countries. The strong response of sentiments to fiscal news makes fiscal consolidation more costly in relatively high debt euro area countries.
