2/2010 Karsten Staehr. The global financial crisis and public finances in the new EU countries from Central and Eastern Europe

Working Papers of Eesti Pank. No. 2/2010

This paper discusses the public finances of the 10 new EU Countries from Central and Eastern Europe, with particular emphasis on the effects of the global financial crisis that started in 2008. The budget outcomes have differed markedly across the new EU countries, both before and during the crisis. The direct impact of the crisis on public finances was limited, but the severe downturns have strained public finances and increased debt ratios considerably. Estimations of budget reaction functions reveal that the budget balance has, in general, been moderately counter-cyclical, but also that the counter-cyclicality derives entirely from the revenue side. The medium-term fiscal outlook rests, to a large extent, on growth prospects. The uncertainties regarding future economic growth and stability in financial markets suggest that several of the new EU countries need to tighten fiscal policies as a medium-term prudential measure.
JEL Code: H6, E62, P27
Key words: global financial crisis, fiscal policy, budget reaction functions, Central and Eastern Europe

* Tallinn University of Technology, Estonia, and Bank of Estonia, Estonia. The author would like to thank Zsolt Darvas and Martti Randveer as well as seminar participants at Brighton University and Bank of Estonia for useful comments. All errors remain the responsibility of the author.

Author's e-mail address: karsten.staehr [at] tseba.ttu.ee, karsten.staehr [at] eestipank.ee

The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction
2. The public sector in the new EU countries
3. The impact of the global financial crisis on the new EU countries
4. The short-term fiscal effects
5. Automatic and discretionary budget reactions
6. Fiscal policy and management in the medium term
7. Final comments
References
Appendix A: Headline budgetary figures for the new EU countries

The Global Financial Crisis and Public Finances in the New EU Countries from Central and Eastern Europe, Working Papers of Eesti Pank No 2/2010 (PDF*)

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