European Commission, Economic and Financial Affairs, (2019), “Fiscal Sustainability Report 2018 Volume 1”, Institutional Paper 094, 18 January
The EU government debt ratio has been continuously decreasing since 2014, and reached around 81% of GDP in 2018, supported by the solid economic activity – albeit a slower growth pace last year – still favourable financial conditions, and a broadly stable fiscal outlook. At the same time, some other advanced economies exhibit much higher and non-decreasing government debt ratios (around 238% of GDP in Japan and around 106% of GDP in the United States in 2018). Yet, some high debt countries – such as Italy, Cyprus, France and Spain – are still faced with increasing or not sufficiently receding debt burdens, remaining therefore exposed to unfavourable shocks.
Favourable macroeconomic conditions and an accommodative monetary policy should be used to re-build fiscal buffers, especially in high debt countries, in time to absorb new shocks when they come, not least a foreseeable rise in interest rates. In the latter, failure to reduce government debt increases the risk of heightened market pressures, which could have negative spillover effects on other Member States. Hence, in a context where uncertainties remain high – both on the external and domestic sides ) – Member States need to run prudent fiscal policies to ensure sound public finances in the short to longer term.
The Commission analysis of public finances sustainability critically contributes to the monitoring and coordination of Member States’ fiscal policies, as well as of the aggregate fiscal stance for the euro area. As “sound public finances” is one of the guiding principle of the Union’s economic policy, the Commission fiscal sustainability analysis plays a key role notably in the context of the Stability and Growth Pact and of the European Semester, the EU integrated surveillance framework (see Chapter 1 of this report). It notably allows identifying fiscal sustainability vulnerabilities that need to be addressed by appropriate policy responses (e.g. in the areas of pension and health care).
- Bańkowski,Krzysztof, Ferdinandusse, Marien, (2017), «Euro area fiscal stance», ECB Occasional Paper Series No 182, January
- Rozenov, Rossen, (2017), «Public Debt Sustainability Under Uncertainty : An Invariant Set Approach», IMF Working Paper, 13 March