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The analysis reveals that direct and indirect fiscal costs of the financial crisis will be massive.
23 June 2009.
The report reviews how Member States are tackling the challenges from the
financial and economic crisis. It assesses the prospects for public finances
and policy needs ahead based on past experiences with financial crises. It
finds that quick, resolute and comprehensive policy responses in the financial
sector, together with an exit strategy of timely unwinding government
interventions can contain the costs. In addition to the direct fiscal costs of
interventions in the financial sector, large fiscal deficits and low economic
growth rates lead to sharp increases in government debt ratios.
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Finances in EMU - 2009 (9 MB)
When analysing a subset of 49 crisis episodes from the 122 systemic financial
crises that occurred since 1970 around the world, Commission staff find that
net direct fiscal outlays to rehabilitate the banking system averaged 13% of
GDP but were much higher in some cases, notably emerging market
economies.
Experience shows that some factors have contributed to containing the level of
direct fiscal costs. Lower direct fiscal costs and higher recovery rates were
achieved notably, taking into account the severity of the crisis, when the
banking crisis resolution strategy was
Increases in public debt-to-GDP ratios, the most comprehensive measure to
capture fiscal implications from financial crises, went far beyond the direct
costs attributable to tackling the financial sector problems and amounted to,
on average, 20 percentage points during the crisis, which lasted on average 4½
years.
The most recent Commission services forecasts project the public debt-to-GDP
ratio in the EU, which just surpassed the 60% mark in 2008, to jump by 21
percentage points from its low in 2007 to 79.4% of GDP from in 2010. The high
deficit levels, which are to a significant extent structural considering the
nature of the economic and financial shocks, suggest further rising debt ratios
in the years beyond 2010. Experience suggests that any lagging behind of bank
resolution policies risks adding to the fiscal bill. Efforts to restore the
health of the financial sector, even when it implies high upfront fiscal
outlays, are a condition to ensure the full effectiveness of fiscal measures in
support of an economic recovery.
The budgetary developments differ significantly across Member States. Credit
markets and asset prices have played a key role in this context. Countries that
experienced the strongest credit and property booms also had growing current
account deficits and the most buoyant tax revenues and public expenditure
growth during the boom. They are now experiencing the largest tax revenue
shortfalls and deficit and debt increases during the downturn. In a number of
these countries with large macroeconomic imbalances, fiscal space available to
run counter-cyclical fiscal policy without incurring sharp increases in
sovereign and economy-wide risk premia had been curtailed from the start of the
crisis. Better tailored fiscal policy should aim at building-up surpluses to
tame down buoyant demand during booms and allowing running counter-cyclical
fiscal policies during busts.
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