Are we able to capture the EU debt crisis? Evidence from PIIGGS countries in panel unit root framework

Abstract

We assess the issue of fiscal sustainability in the selected EU countries. Our sample includes those showing the highest government debts, which are nowadays known under the somewhat degrading acronym – PIIGGS (Portugal, Ireland, Italy, Greece, Great Britain and Spain). Assuming the so-called present value borrowing constraint, stationarity of debts presents a sufficient condition for fiscal sustainability. Utilizing various standard panel unit root tests and the test by Im et al. (2010), we examine this condition on quarterly debt-to-GDP ratios over the period 2000 to 2010. Results provide evidence, that when trend breaks in the series are incorporated, not all of these countries exhibit non-stationarity behavior of their debt-to-GDP ratios.Fiscal sustainability, Government debt, Panel unit-root tests