The Baltic Countries: Medium-Term Fiscal Issues Related to EU and NATO Accession

Occasional Papers, April 12, 2002

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Ten years after regaining independence, the Baltic Countries--Estonia, Latvia, and Lithuania--are expected to be invited to join the European Union (EU) and NATO in 2004.
The paper provides a macroeconomic perspective on the Baltics' economic success to date and on the fiscal challenges the Baltics face in joining the EU and NATO.
The authors derive principles on the appropriate medium-term fiscal stance for the Baltics based on theory and empirical evidence.

Examination of the experience of countries that acceded to the EU earlier—Greece, Ireland, Portugal, and Spain—serves as a comparative basis.
Three medium-term analytical frameworks are developed to illustrate fiscal tensions and trade-offs facing the Baltics.
Primary policy advice supports the Baltic authorities' decision to maintain prudent fiscal policy by balancing their budgets over the economic cycle.
Curtailing nonpriority spending is acknowledged as politically difficult but is identified as necessary to achieve:
- more efficient public spending,
- enhanced growth prospects,
- accelerated real convergence with the EU.

Maintain a prudent fiscal stance: balance budgets over the economic cycle.
Prioritize spending efficiency by curtailing nonpriority spending to free resources for growth-enhancing public expenditure.
Use lessons from earlier EU acceding countries (Greece, Ireland, Portugal, Spain) to anticipate fiscal tensions and trade-offs during accession.

Subject: Balance of payments, Expenditure, Fiscal policy, Foreign direct investment, Public debt, Revenue administration
Keywords: accession candidate, Baltics, country, EU accession, EU budget, EU grant, EU membership, Foreign direct investment, OP