Institutional Transparancy Compensators and Fiscal Expansion in CEE Countries

Abstract

CEE countries demonstrate specific type of macrofiscal vulnerability. Functional convergence with so called «old EU» takes place with shift toward higher level of GDP redistribution through budget and higher level of public debt. Such fiscal expansion coexists with high CEE countries globalization level, real and institutional convergence. But, quality of institutions, for example government efficiency, is still low then in «old EU». Institutional convergence gap with reached fiscal convergence are challenging for further development in the region. CEE countries may choose between slower real convergence, narrowing fiscal reactions on shock, harder fiscal limits for investment into quality of institutions. It is stressed that CEE countries should choose «smaller government» that invests in quality of institutions. Such policy helps to avoid future debt unsustainability and support real convergence.