Fiscal sustainability analysis in EU countries: a dynamic macro-panel approach

Abstract

In this work, we analyze fiscal sustainability for 26 EU and PIIGS countries in terms of Bohn's (2008) approach. In this context, we use primary surplus-to-GDP, public debt-to-GDP, government revenues/expenditures-to-GDP, business cycle, and fluctuations in government expenditures variables in the period 1995-2018. A positive and long-run relationship between lagged public debt and primary surplus-to-GDP indicates that fiscal policy is sustainable for the EU, overall. However, the fiscal sustainability criterion is not met for the PIIGS since the transversality condition is not met. Empirical findings of the study underline an effective regulatory policy framework to monitor fiscal policy developments for both core and periphery EU states.