2010 Report on Public Finances in EMU: debt crisis highlights need for fiscal consolidation and stronger surveillance
16.06.2010 - The 2010 Report on Public Finances in EMU presents recent budgetary
developments, reports developments in budgetary surveillance and draws lessons
for debt reduction strategies.
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
- 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
Public finances in EMU 2010 (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