Are EU budget deficits sustainable?

In this paper, we test for the stationarity and sustainability of European Union budget deficits over the period 1971 to 2006, using a panel of thirteen member countries. Our testing strategy addresses two key concerns with re- gard to unit root panel data testing, namely (i) the identification of which members-states are stationary, and (ii) the presence of cross-sectional depen- dence. We employ a moving block bootstrap approach to the Hadri (2000) procedure that tests the null of joint stationarity. In contrast to the existing literature, we find that the EU countries considered are characterised by fiscal sustainability over the full sample period. This conclusion also holds when analysing sub-periods based on before and after the Maastricht treaty.