In this paper, we investigate the link between fiscal consolidations, productivity, and economic growth in the Euro Area. First, we provide novel empirical evidence on the negative impact of fiscal austerity on productivity using granular data from Euro Area regions. Second, we demonstrate that an open-economy New Keynesian model extended by Schumpeterian endogenous growth can reproduce our empirical findings. Finally, we test a central model prediction in the data: how the varying degree of innovation efficacy determines the regional differences in productivity and real effects of fiscal consolidations. Joint paper with Ricardo Duque Gabriel, Mathias Klein, and Ana Sofia Pessoa.