Fiscal Policy Stance and Debt Sustainability in SEE countries: A Comparative Analysis

Following a period of declining debt in the current decade, recent developments in view of the current global financial crisis brought again to the fore the issue of public debt in SEE emerging market economies. The existing fiscal vulnerabilities pose a major challenge for consolidation. This paper places an emphasis on the SEE countries' fiscal structure in a comparative perspective, since public debt has often had more immediate consequences for economic performance and debt crisis has been a recurring phenomenon of the histories of many of these countries. The macroeconomic data series show that all countries in our sample have made efforts towards a successful fiscal consolidation over the last decade - largely supported by strong output growth and low real interest rates. However, the empirical evidence is suggestive of a weak link between public debt sustainability and the short-run conduct of fiscal policy. This means that the short-run conduct of fiscal policy does not tend to improve debt sustainability and hence to reduce the probability of sovereign risk in SEE.