Entry and Exit Dynamics of Excessive Deficits in the European Union

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 3 percent of GDP, except under 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 theses 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