The annual report on the public finances in EMU brings together in a single publication a review of key policy developments and analytical findings in the area of the public finances. While considering the public finances in a wide sense, the particular focus of this year's report is sustainability, with the descriptive parts looking at the consolidation measures and policy changes required to aid an improvement in sustainability and the analytic parts focusing on what determines it and how it can be measures. In more detail though, the report starts with a detailed description and analysis of recent budgetary developments and an assessment of the outlook over the coming years. Second, it discusses the proposed reform to the EU's fiscal surveillance framework, which is currently awaiting final approval in the Council and the European Parliament. The third and fourth parts of the report provide analytical work on topical issues for fiscal policy makers. This year the focus in the third part is on the relationship between national fiscal frameworks and the spreads on sovereign debt – a topic that relates the reform of the EU budgetary surveillance framework with the issue of market expectations of sustainability. The analysis in the report shows that the quality of fiscal rules affects market expectations, with weak rules leading to higher spreads over bunds, once fiscal variables including the debt and deficit ratios have been controlled for. Finally, in its fourth part the report considers how the EU's current sustainability analysis can be improved and widened by complementing it with additional methodologies. The methodologies presented take on board some of the lessons of the crisis – namely that the financial sector poses a sustainability risk and that macrofinancial imbalances are also a key determinant of risk – and model them to enhance the assessment of sustainability. The possibility of using consolidations to close the gap in funding is also considered within a sustainability framework, with fiscal reaction functions being incorporated into standard analysis, and the effect of tax increases on revenue streams being analysed.
(European Economy. 3. September 2011.
Brussels. 215pp. Tab. Graph. Ann. Bibliogr. free.)