European Commission

Events in Spring 2010 have exposed the urgency of addressing the fiscal challenge in the euro area and the EU, as high and rising public debts have raised concerns about governments' solvency. Sovereign risk premia have shot up to levels unprecedented in EMU in Member States with perceived high budgetary and macro-financial risks.

This year's edition of the Report on Public Finances reviews how Member States' fiscal policies have evolved in the wake of the financial and economic crisis. It assesses the prospects for public finances and policy needs ahead.

• The first part reports on developments in public finances, highlighting the rise in deficit and debt across the EU and the underlying factors. It documents the implementation of EU budgetary surveillance (excessive deficit procedures and examination of stability and convergence programmes).

• The second part analyses developments in budgetary surveillance, focusing on (i) the implementation of the Stability and Growth Pact throughout the crisis; (ii) ways to improve the measure of the cyclically-adjusted budget balance; and (iii) the role that national fiscal frameworks can play in promoting sound budgetary policies and consolidation.
• The third part analyses trends in government which may raise questions on solvency, particularly against the backdrop of ageing populations, and prospects for its reduction. It analyses determinants of successful fiscal consolidations based on cross-country econometric analysis, model simulations and case studies. Although there is no one-size-fits-all solution and starting conditions play an important role in defining the right strategy, gradual and expenditure-based consolidations are generally preferable to 'cold-shower' revenue-based ones. Nevertheless, revenue-based consolidations can also be effective, and sometimes only 'cold-shower' consolidation can be viable.
• Finally, in its fourth part, the report also analyses the link between fiscal policy and external imbalances. The countries that suffered the greatest deterioration in their public finances during the crisis had typically experienced increasing external imbalances and booming credit and domestic demand in the years running up to the crisis, while the countries that suffered the smallest deterioration generally had displayed stable or falling macro-financial risks. The implications for the conduct of fiscal policy are reviewed and surveillance tools in the form of risk indicators are presented.

>> Public finances in EMU 2010 [6 MB]  (European Economy 4/2010)

>> Press release IP/10/703: 2010 Report on Public Finances: sovereign debt crisis highlights the needs for fiscal consolidation and strengthening surveillance