Fiscal Adjustments in the European Union versus West Balkans economies: Evidence from Heterogeneous Panels

Abstract

This paper empirically assesses heterogeneity of fiscal adjustments in the European Union and West Balkans economies, in the circumstances when debt crisis renewed the questions when and how governments adjust their public expenditure. The research covers sample of 28 European Union economies and 5 West Balkans economies over the period 1995-2018. The results based on PMG panel model point to weak fiscal sustainability with significant fiscal adjustments, in average, 28.18 % of deviations from equilibrium relationship are corrected in one year. Moreover, the results provide heterogeneous evidence of fiscal adjustments of public expenditure to long-run equilibrium relationship in European Union and West Balkans economies. Implications of the results for the West Balkans economies are that accession process to European Union means improvements in public finances of candidates and potential candidate economies, in the context of achieving weak fiscal sustainability. However, accession process does not lead to automatic convergence of economies and fiscal sustainability assessment, although significant fiscal adjustments are noted.