Can EU high indebted countries manage to fulfill fiscal sustainability? Some evidence from the solvency constraint

Andreea Stoian () and Rui Alves
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Andreea Stoian: Department of Finance, Bucharest University of Economic Studies

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: The public finance constraints introduced by the Maastricht Treaty have been subject to numerous debates among economists. Balassone and Franco (2000) pointed out, for instance, that the fulfillment of these constraints allows for fiscal discipline and flexibility and excludes any bias from an unsustainable fiscal policy in the long run. But data shows that many of the advanced economies have exceeded the limits for budgetary deficits and public debt since 1993. Therefore, the question on whether fiscal policy is sustainable naturally arises. The aim of this paper is to investigate the achievement of the solvency constraint for the European Union high indebted countries using a simple public debt dynamic model. The required primary surplus is estimated under different scenarios, namely: (i) a baseline that aims at stabilizing public debt; (ii) a 60% of GDP scenario; and (iii) a minimum public debt scenario that differs among the countries under analysis. From results, we try to draw conclusions on what really matters for fiscal sustainability.

Keywords: Fiscal policy; primary balance; public debt; fiscal sustainability; Maastricht Treaty (search for similar items in EconPapers)
JEL-codes: E62 H62 H63 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2012-08
New Economics Papers: this item is included in nep-eec and nep-mac
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Citations: View citations in EconPapers (2)

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