Introduction

In reviewing key policy challenges facing the governments of the ten new Member States, one can identify two major challenges:

• the need for fiscal restraint in the run-up to membership in the Economic and Monetary Union;

• the role of monetary and fiscal policies and the independence of the central bank.

The developments in the area of public finance and the need to reduce budget deficits sharply in the next several years constitute by far the biggest challenge for accession countries. This challenge is of particular importance for the largest economies in the group, as, in their case, the build-up in government spending over the last several years has resulted in a public finance position that is not sustainable in the longer term. Moreover, their fiscal situation threatens to prevent the economies not only from meeting the Maastricht criteria, but also from reaching their growth potential. In this chapter, we expand our analysis of the fiscal position of the accession countries and discuss likely scenarios of developments. In order to keep the study manageable, while providing a comprehensive review of the issues involved, we concentrate on analysing the situation prevalent in the three largest new EU member economies: Poland, the Czech Republic and Hungary (hereinafter referred to as the CE-3). These three economies accounted for 78% of the GDP of all accession countries in 2002 and were (with the exception of Malta) by far the furthest from meeting the Maastricht criterion for fiscal budget deficit levels.