EU accession and the hardening of soft budget constraints: Some macro evidence

The hardening of soft budget constraints (SBCs) is a central element in transforming the economies of Central and Eastern Europe into market economies. This paper presents macro evidence on budget hardening of transition economies comparing the performance of EU accession countries relative to non-accession countries. We estimate SBC hardening for 21 transition economies in a partial adjustment model by measuring the reaction of employment to output changes over a 10-year period. The paper finds that accession candidates have reduced excess labour demand substantially relative to non-accession countries. © Springer Science+Business Media, LLC. 2007.