Twin deficits threat in the European Union

The aim of the contribution was to identify presence and contagion threat of twin defi cits, i. e. budget and current account defi cit in the EU countries. Using correlations and Granger testing we recorded existence of twin defi cits in most of EU countries. In several countries confi rmed traditional causality that budget defi cit implies current account defi cit. In several other the opposite, known as current account targeting, was true. In two counties (Spain and) bi-causality was detected. We consider existence of bi-causality as the most complicated in practice. Then it is a real vicious cycle. Policy makers must target both imbalances at the time, to solve this problem, which can be very diffi cult. Persistent macroeconomic problems in two countries confi rm our assumption. Our paper extends existing literature by determination two thresholds for public debt-to-GDP which modify occurrence and risk of twin defi cits in the countries. These break points were identifi ed via threshold panel data model. Twin defi cits are not probable for countries with public debt-to-GDP lower than 30. 668%. However, of this phenomenon is much higher if public debt is from 30. 688% to 98. 126%. Countries with debt over 98. 126% suffer from high and persistent twin imbalances. Therefore we suggest of Maastricht criterion on public debt and its reduction to 30%. Finally we observe effect of twin defi cits throughout EU countries regardless their economic performance or euro area membership which is indirectly triggered also in the case of non-euro area members.