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Entry and Exit Dynamics of ‘Excessive Deficits’ in the European Union

PFM, Vol. 1 No. 1, (2001)

The extent of government deficits and debt has been one of the most
debated issues in recent years. However, very little has been contributed
about their dynamics. Yet, the issue of entering into and exiting from
excessive deficits will be critical in the European monetary union since the
Stability and Growth Pact rules out deficits larger than three percent of
GDP, except strictly defined unusual conditions. This paper provides a
transition data analysis of the dynamics of public deficits. It shows the
asymmetric role played by the economic determinants in this dynamics and
estimates the evolution of the probability of entering into and exiting from
excessive deficits for each one of the member states of the European Union
since 1970. It also reveals how the concurrence of some minor changes may
produce a major switchover in public finance outcomes. Finally, it points to
the fragility of some countries even if they are now out of excessive deficits.

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