Fiscal Sustainability of Eu Member States in the Context of Current Financial Crisis

Abstract

This paper tackles the question of fiscal sustainability in current times of financial/economic crisis. Our literature review leads us to conclusion that when fiscal sustainability is being considered, putting fixed limit to public debt-to-GDP and budget balance-to-GDP ratio is a too simplified solution and that sustainable fiscal policy might be defined with public debt-to-GDP and budget balance-to-GDP ceilings, but taking into account some underlying country specific parameters. Our empirical analysis shows that most EU Member States entered year 2008 with healthy public finances. However, most EU Member States now face fiscal difficulties. Even more: almost all EU Member States would have to decrease budget deficit in 2009 and 2010, in order to achieve sustainable budget position. The extensive jumps in fiscal deficits in 2009 and 2010, compared to 2007 (before crisis), are mainly due to lower fiscal incomes as a consequence of lower economic growth and policy measures for tackling financial/economic crisis. We argue that these changes in fiscal deficits are not sustainable. Our analysis shows that in 2009 about 2/3 of the economies in question should have budget surplus, taking into consideration other relevant macroeconomic variables, such as economic growth, etc. In 2010, however, a more loosened fiscal policy would be possible, but still significantly lower fiscal deficit than forecasted would be sustainable.