Can EU conditionality remedy soft budget constraints in transition countries?

Soft budget constraints (SBCs) are a persistent feature of transition economies and have been blamed for a lack of fiscal consolidation and sluggish growth. EU eastward enlargement has been conditioned on tackling SBCs. This paper analyzes such outside conditionality theoretically and empirically. First, by modeling the SBC problem as a war of attrition between the applicant countries' governments and firms, we find that outside conditionality can foster SBC hardening. Second, estimating SBC hardening in a partial adjustment model by measuring the development of labor productivity, we find that EU conditionality did indeed help candidates to tackle SBCs. Journal of Comparative Economics 33 (2) (2005) 371–386.