Fiscal policy has turned out to be one of the most challenging components of the transition process in the Central and East European Countries (CEECs), not least because the government budget reflects many of the difficulties arising from other aspects of post-Communist stabilization. These include the budgetary costs associated with high unemployment, bank recapitalization, and above all with the state pension system. During transition, moreover, the state of public finances serves as an index of the progress achieved in stabilization and the degree of internal consistency and far-sightedness of transition policy.

Thus, the very objective of attaining fiscal and external balance is a major goal in itself for transition. Leniency on budget deficits, indebtedness, or inflationary finance threatens to undermine macro stability and the coherence and success of the reforms in general. In addition, sound fiscal fundamentals are prerequisites for successful institutional reforms at the micro-level. Finally, integration into the European Union (EU) will require convergence to some appropriate criteria for macroeconomic balance.

This issue of the EPI Forum Report, written by experts from both the East and the West, presents an assessment of the fiscal challenges facing the CEECs as they attempt to negotiate their entry in the EU. The first part of the report centres around a three-fold evaluation of the fiscal situation in these countries: its dynamic development; inter-country comparisons; and the wider European context. The second part investigates the relationship between fiscal policy and the overall success of economy-wide restructuring in terms of social expenditures and the role of fiscal policy in macroeconomic stabilization, including sterilization policies.

The report ends with a discussion of recommendations for fiscal policy reform and how to link fiscal reforms in the CEECs to accession to the EU. Specific suggestions for macroeconomic accession criteria include inflation targets, limits on government debt and programmes for reducing the scale of contingent liabilities of government debt. It is argued that these would benefit both the EU, by admitting countries with sounder finances, and the accession candidates, by making politically difficult fiscal reform measures more acceptable to their citizens.

This is a succinct yet comprehensive account of the fiscal situation in the CEECs, of interest to anyone concerned with the economics and politics of the region.

Fiscal Policy in Transition – Forum Report of the Economic Policy Initiative no. 3 (ISBN: 1 898128 30 8) is available from CEPR for £10/$14.95.