In its focus section, the October 2011 edition of the Quarterly Report examines the challenge of sovereign debt sustainability in the euro area. Not only do the higher debt levels following the crisis require higher primary surpluses to cover the additional interest payments, but high debt can also act as a brake on growth. The focus shows that setting public finances on a sustainable path will require significant additional consolidation measures in a number of Member States, although the responses required are not unprecedented. Responding in a timely manner can reduce the overall adjustment required and ensure that Member States benefit as soon as possible from the positive impact of debt reduction on growth. The focus also presents instruments to assess the risk of fiscal crises that should help policymakers to act timely in the face of future adverse shocks.

Special topics in this edition address various aspects of macroeconomic adjustment, principally those where market-based mechanisms prevail, but in which policy action can play a powerful facilitating role. In particular, simulations using the Commission's QUEST model show that changes to employment taxation and public sector wage policies can emulate the growth-boosting effects of nominal exchange rate depreciations. A further section argues that facilitating the reallocation of capital and labour resources between industrial sectors can make the rebalancing of large external deficits less painful. Furthermore, structural reforms such as lowering levels of product market regulation can improve macroeconomic resilience to shocks. A final contribution on housing markets finds that appropriate taxation and regulation of housing markets can help curb excessive house price volatility and its adverse macrofinancial repercussions. Conversely, some features of the mortgage markets such as variable mortgage rates and high loan-to-value ratios raise the risk of housing market imbalances.