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International Tax and Public Finance

, Volume 25, Issue 5, pp 1170–1196 | Cite as

A test of fiscal sustainability in the EU countries

  • Kyung-woo Lee
  • Jong-Hee Kim
  • Taeyoon Sung
Article
  • 172 Downloads

Abstract

In this paper, we evaluate fiscal sustainability of five regional groups in the EU using the dataset of 26 countries for the period 1950–2014. To this end, we estimate their policy rules in which primary surpluses respond to public debt and examine whether estimated policy rules satisfy the conditions for fiscal solvency. In the baseline solvency tests with time-invariant marginal responses of primary surpluses, we find that estimated policy rules satisfy the solvency condition that the marginal response be positive for the Benelux, northern, and eastern groups but fail to do so for the western and southern groups. When estimating their policy rules separately for eurozone and non-eurozone countries, we find that long-term fiscal sustainability of eurozone countries is more questionable in the sense that non-eurozone countries in all regional groups have significantly positive marginal responses, whereas eurozone countries in most regional groups do not. Finally, more general solvency tests that allow time-varying marginal responses reveal that only the Southern group fails to satisfy the generalized solvency conditions that marginal responses be always nonnegative and positive infinitely often. These findings seem to be consistent with the fact that countries in the Southern group experienced severe fiscal crises.

Keywords

EU Debt Sustainability Eurozone 

JEL Classification

H6 E62 F45 

Supplementary material

10797_2018_9488_MOESM1_ESM.docx (50 kb)
Supplementary material 1 (DOCX 50 kb)

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.School of EconomicsYonsei UniversitySeoulKorea
  2. 2.Department of EconomicsChonbuk National UniversityJeonju-siKorea

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