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The paper focuses on interactions between fiscal dynamics and current account imbalances, and their impact on business cycle synchronization in the euro area over the years 2001-2017. To join these two effects, we used panel data threshold model, which determined three intervals of current account differences and estimated separate relation between fiscal disparities and output gap disparities in each interval. If current account differences are small (1st interval), the threshold model concluded for strong positive effect of smaller budget balance differences on business cycle synchronization. Nevertheless, higher current account differences (2nd and 3rd interval) are accompanied by not significant or negative effect of budget balance differences on output gap differences, i.e. there is no effect of fiscal convergence on business cycle synchronization. As far as policy implications, if economic policies try to achieve tighter business cycles by a fiscal convergence, they need to take into account possible tools how to decrease current account imbalances as well.

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The aim of the contribution was to identify presence and contagion threat of twin defi cits, i.e. simultaneous budget and current account defi cit in the EU countries. Using correlations and Granger causality testing we recorded existence of twin defi cits in most of EU countries. In several countries we confi rmed traditional causality that budget defi cit implies current account defi cit. In several other countries the opposite, known as current account targeting, was true. In two counties (Spain and Hungary) bi-causality was detected. We consider existence of bi-causality as the most complicated situation in practice. Then it is a real vicious cycle. Policy makers must target both imbalances at the same time, to solve this problem, which can be very diffi cult. Persistent macroeconomic problems in these two countries confi rm our assumption.Our paper extends existing literature by determination of two thresholds for public debt-to-GDP which modify occurrence and risk of twin defi cits in the EU countries. These break points were identifi ed via threshold panel data model. Twin defi cits problems are not probable for countries with public debt-to-GDP lower than 30.668%. However, risk of this phenomenon is much higher if public debt is from 30.688% to 98.126%. Countries with public debt over 98.126% suffer from high and persistent twin imbalances. Therefore we suggest reconsideration of Maastricht criterion on public debt and its reduction to 30%. Finally we observe contagion effect of twin defi cits throughout EU countries regardless their economic performance or the euro area membership which is indirectly triggered also in the case of non-euro area members.