Fiscal Sustainability in the Mediterranean Region Romanian Journal of Economic Forecasting – 4/2008 161 FISCAL SUSTAINABILITY IN THE MEDITERRANEAN REGION – A COMPARISON BETWEEN THE EU AND NON-EU MEMBER STATES Aleksander ARISTOVNIK* 1 Abstract The paper’s main purpose is to assess the short-, medium- and long-term sustainability of fiscal policy in the great majority of the EU and non-EU member states in the Mediterranean Region. By using mainstream (primary fiscal gap) theory (proposed by Buiter (1983) and Blanchard (1990)), the difference between the required primary fiscal balance to GDP ratio and the actual primary fiscal balance to GDP ratio is calculated for selected Mediterranean countries. Based on simple mainstream theory measures of fiscal sustainability, the results indicate that fiscal sustainability seems to be a problem in many Mediterranean countries, particularly in Greece, Italy and France (in the EU Mediterranean region) as well as in Croatia, Egypt, Lebanon and Turkey (in the non-EU Mediterranean region). However, since the paper is dealing with an ex ante analysis on the grounds of ex post algebra of sustainability some caution should be exercised. Keywords: the Mediterranean region, public finance, fiscal sustainability, forecasting JEL Classification: H60, H68 1. Introduction Fiscal sustainability has recently drawn greater attention in the enlarged EU. Indeed, the EU fiscal framework, fiscal discipline has been an important support for the implementation of the Economic and Monetary Union (EMU). In this respect, the existence of sound fiscal policies in the EU Member States in Mediterranean region is seen as a necessary objective for individual countries to pursue. It is not possible to exclude adverse responses from the financial markets when fiscal behaviour is deemed to be unsustainable. Moreover, the Treaties governing the EU also require sustainable public finances. Countries are urged to comply with the budgetary requirements of EMU, by avoiding excessive deficits, keeping debt levels below the 60 percent of GDP reference value, and respecting the requirements of the Stability and Growth Pact (SGP). * Aleksander Aristovnik, Ph.D., is Assistant Professor of International and Public Sector Economics at the University of Ljubljana (Faculty of Administration and Faculty of Economics), e-mail: aleksander.aristovnik@fu.uni-lj.si 7