Public Investment, Growth and Fiscal Constraints

Public Investment, Growth and Fiscal Constraints

Challenges for the EU New Member States

Edited by Massimo Florio

This book makes a unique contribution in advancing understanding of the fiscal condition and growth potential of the New Member States of the European Union. It provides new data, policy evaluation, and offers national and regional perspectives. The core research questions are the effect of public investment in the context of macroeconomic disequilibrium and how it is possible to finance capital accumulation in the present and future conditions of mounting public sector debt.

Chapter 6: Public Investment and Growth in the EU New Member States: An Overview

Jan Hanousek and Evzen Kocenda

Subjects: economics and finance, public finance, regional economics, urban and regional studies, regional economics


Jan Hanousek and Evžen Kočenda* INTRODUCTION This overview provides a thorough description of the major macroeconomic developments in the New Member States (NMS) that joined the European Union (EU) in 2004 and 2007.1 A particular focus is the NMS’ public investment developments and trends, including the implications of the global financial crisis. As a complement to this overview a disaggregated structural database has been completed, which is useful for a detailed analysis and cross-country comparison. The overview also contains new member country profile pages with template indicators, an analysis and a database appendix for quick reference. Regarding post-accession performance, most of the new EU Member States exhibited accelerated growth after joining the EU, which resulted in a very fast convergence, far exceeding expectations (Rosenberg, 2008). Increased access to foreign capital and financial deepening are seen to be among the major driving forces (Figure 6.1). This post-accession boom exposed the region to new vulnerabilities such as large current account deficits, cross-border contagion risks and currency mismatches. These vulnerabilities have limited the effectiveness of the region as large corporations had vast opportunities to borrow directly from abroad. Even though the overall macroeconomic environment in the region was fairly good during the early 2000s, a lack of fiscal adjustments remained one of the major concerns (Kočenda et al., 2006). For instance, public debt ratios were not declining and exceeded the maximum prudent level for key new EU Member States as indicated in Figure 6.2. With the global financial crisis that...

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