Fiscal Sustainability in the EU

We assess the sustainability of fiscal policy in the EU-28 countries over the 1980-2015 years. Panel unit root tests in presence of cross-sectional dependence show that government revenues, expenditures, the primary balance, and debt are non-stationary series. However, cointegration tests reveal that a long-run relationship exist between government revenues and expenditures as well as between government primary deficit and debt. The results of causality tests are in line with the neutrality hypothesis: government revenues do not cause the expenditures, and vice versa. Furthermore, mixture models analyses indicate the presence of three homogeneous clusters, one of which includes the PIIGS, whose coefficient of 0.68 indicates the absence of sustainability, since government expenditures grow faster than revenues