Public finance sustainability in Europe: a behavioral model.

Summary This paper investigates the sustainability of public finances in the European countries since 2002. We provide evidence of heterogenous behaviors among the EU countries and show that, even if they had been forced to focus their fiscal efforts on correcting the deviations of debt from their ceiling -through a correcting mechanism such as the recent TSCG rule-, this would not necessarily have changed the likelihood that debt and deficits become more sustainable. Sources of deviations from stable debt and deficits are related to the macroeconomic environment: the interest-growth differential, momentum dynamics in the sovereign bond markets, how markets react to rising debt.