As a consequence of the 2008-2009 financial crisis, the sustainability of public finance has received growing attention. The rise of public indebtedness of many industrial countries during the last decades of the twentieth century caused increasing concern about the potentially unfavourable effects of ever-expanding public debt and slow rates of economic growth. Theoretically, equilibrium growth paths must include adequate fiscal policy to support stability. In this regard, the European Union’s treaties impose the practical necessity of sustainable public accounts with the requirement that the public debt/GDP ratio is held below 60%, and the public deficit/GDP below 3%.
A major question emerging from the global economic and financial crisis of 2008 is how to restore a country’s economic growth while restoring fiscal health. This is relevant to the Eurozone due to its dismal economic growth prospects coupled with high levels of public debt. Government debt and slow economic growth underscore the importance of understanding the potential effects for fiscal sustainability and economic growth and the trade-offs these often conflicting goals entail.
The standard approach in the economics literature to the analysis of the sustainability of fiscal policies implies stationarity and unit root tests for public debt and deficit, and cointegration tests between public expenditures and revenues. The issue of fiscal sustainability for the Eurozone has been addressed in a small number of studies, including Forte and Magazzino (2016), Ciżkowicz et al. (2015), Esposito (2015), Magazzino and Lepore (2015), Afonso (2008), Claeys (2007), and Balassone et al. (2006). Our study, which is based on a panel approach and includes the crisis years, is the first study that considers fiscal sustainability of the Eurozone as a whole, within a panel data framework.
Keywords: Fiscal sustainability; public expenditure; revenues; primary deficit; public debt; EU; panel data.