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Can EU Conditionality Remedy Soft Budget Constraints in Transition Countries?

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  • Herbert Brücker
  • Philipp J. H. Schröder
  • Christian Weise

Abstract

Soft budget constraints (SBCs) are a persistent feature of transition economies and have been blamed for i.a. a lack of fiscal consolidation and sluggish growth. EU eastward enlargement has - among other things - been conditioned on tackling SBCs. This paper analyzes such outside conditionality theoretically and empirically. First, modelling the SBC problem as a war of attrition between the applicant countries' governments and firms we find that outside conditionality can foster SBC hardening. Yet, toughening the EU stance or reducing the number of enlargement rounds may have ambiguous effects. Second, estimating SBC hardening in a partial adjustment model by measuring the reaction of employment to output changes we find that EU conditionality did indeed help candidates to fight SBCs.

Suggested Citation

  • Herbert Brücker & Philipp J. H. Schröder & Christian Weise, 2003. "Can EU Conditionality Remedy Soft Budget Constraints in Transition Countries?," Discussion Papers of DIW Berlin 375, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp375
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    Cited by:

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    3. Glawe, Linda & Wagner, Helmut, 2021. "Convergence, divergence, or multiple steady states? New evidence on the institutional development within the European Union," Journal of Comparative Economics, Elsevier, vol. 49(3), pages 860-884.
    4. Coricelli, Fabrizio & Driffield, Nigel & Pal, Sarmistha & Roland, Isabelle, 2012. "When does leverage hurt productivity growth? A firm-level analysis," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1674-1694.
    5. Everaert, Greetje M.M., 2004. "The political economy of restructuring and subsidisation : an international perspective," BOFIT Discussion Papers 12/2004, Bank of Finland, Institute for Economies in Transition.
    6. Tomoe Moore, 2009. "Soft Budget Constraints in EU Transition Economy Enterprises," International Finance, Wiley Blackwell, vol. 12(3), pages 411-430, December.
    7. Fabrizio Coricelli & Nigel Driffield & Sarmistha Pali & Isabelle Roland, 2011. "Optimal Leverage and Firm Performance: An Endogenous Threshold Analysis," CEDI Discussion Paper Series 11-05, Centre for Economic Development and Institutions(CEDI), Brunel University.
    8. Herbert Brücker & Philipp Schröder, 2007. "EU accession and the hardening of soft budget constraints: some macro evidence," Economic Change and Restructuring, Springer, vol. 40(3), pages 235-252, September.
    9. Ayala, Astrid & Blazsek, Szabolcs, 2013. "Structural breaks in public finances in Central and Eastern European countries," Economic Systems, Elsevier, vol. 37(1), pages 45-60.
    10. Astrid Ayala & Szabolcs Blazsek, 2012. "How has the financial crisis affected the fiscal convergence of Central and Eastern Europe to the Eurozone?," Applied Economics Letters, Taylor & Francis Journals, vol. 19(5), pages 471-476, March.
    11. Christian H. Fahrholz, 2007. "Bargaining for Costs of Convergence in the Exchange-Rate Mechanism II," Journal of Theoretical Politics, , vol. 19(2), pages 193-214, April.

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    More about this item

    Keywords

    soft budget constraint; EU enlargement; war of attrition;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • P21 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Planning, Coordination, and Reform
    • P26 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Property Rights
    • P30 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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