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Fiscal convergence and sustainability in the European Union

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  • Vladimir Arcabic

    (University of Zagreb, Faculty of Economics and Business, Department of Macroeconomics and Economic Development, Zagreb, Croatia)

Abstract

This paper analyzes fiscal convergence and sustainability in the European Union using data on government debt, revenues, and expenditures. Absolute fiscal divergence is present in the EU, especially after the sovereign debt crisis. However, we find evidence of fiscal club convergence when clubs are endogenously determined. Club convergence is important for the EU because there is no single fiscal policy and member states’ policies are heterogeneous. Endogenous clubs do not share the usual geographical, political, or development similarities. Fiscal policy in the EU is found to be unsustainable, but it is countercyclical. We use a policy response function where the primary surplus is a function of public debt and the output gap. The primary surplus does not respond to changes in public debt, and this is considered to be unsustainable. However, it increases in expansions and decreases in recessions thus being countercyclical. The countercyclical primary surplus is important for smoothing business cycles.

Suggested Citation

  • Vladimir Arcabic, 2018. "Fiscal convergence and sustainability in the European Union," Public Sector Economics, Institute of Public Finance, vol. 42(4), pages 353-380.
    • Handle: RePEc:ipf:psejou:v:42:y:2018:i:4:p:353-380
    DOI: 10.3326/pse.42.4.1
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    Cited by:

    1. Alka Obadić & Vladimir Arčabić & Lucija Rogić Dumančić, 2021. "Labor market institutions convergence in the European Union," EFZG Working Papers Series 2102, Faculty of Economics and Business, University of Zagreb.
    2. Vladimir Arcabic & Frane Banic, 2021. "Characteristics of fiscal policy in Croatia: does it depend on the phase of the business cycle?," Public Sector Economics, Institute of Public Finance, vol. 45(4), pages 433-457.
    3. Kožić Ivan & Arčabić Vladimir & Sever Ivan, 2022. "Tourism and Business Cycles: Does the Relationship Fade Away?," Zagreb International Review of Economics and Business, Sciendo, vol. 25(1), pages 95-110.
    4. Obadić, Alka & Arčabić, Vladimir & Rogić Dumančić, Lucija, 2023. "Club convergence of labor market institutions in the European Union," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 876-896.

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    More about this item

    Keywords

    convergence clubs; fiscal sustainability; public debt; structural breaks; log t test; dynamic panel;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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