EU fiscal policymakers' estimates of potential output appear to be pro-cyclical and too sensitive to latest economic data. The Great Recession led to over-pessimism about potential output which amplified adverse shocks and underestimation of structural balance triggering fiscal austerity. A business cycle model capturing this feature is developed with incorporating the policymaker's learning about potential output. It replicates the pattern of revisions to estimates of potential output, output gap and structural balance made by EU fiscal policymakers as well as several new evidence on fiscal consolidation and its relation to economic performance we document. The mutual reinforcement between pessimism and fiscal austerity may have contributed markedly to the prolonged recession. Placing less weight to new data (compared to actual EU policy makers) may have reduced real-time mis-measurement of output gap and led to a less severe recession.