How to ensure fiscal sustainability in a growth-friendly manner?

Eloïse Orseau, Henk Van Noten, Pedro Arevalo, Alessandra Cepparulo, Gilles Mourre and Stéphanie Pamies

Quarterly Report on the Euro Area (QREA), 2023, vol. 21, issue 4, 13-24

Abstract: During the COVID-19 crisis, public debt ratios strongly increased, adding in several cases to existing debt vulnerabilities. This situation calls for a gradual, sustained and growth-friendly reduction of debt ratios towards more prudent levels, especially in the face of increasing costs of population ageing and tightening financing conditions. The section discusses the challenge of ensuring debt sustainability in a growth-friendly manner, based on stylised facts, simulations and further analytical insights. Current EU fiscal rules would impose in some cases an unrealistically demanding, frontloaded fiscal adjustment. Moreover, they are only loosely related to country-specific debt levels and sustainability challenges. The recent Commission orientations for a reform of the EU economic governance framework focus on debt sustainability in the medium term, while promoting long-term sustainable growth. A revised EU framework would build around Member States' medium-term fiscal-structural plans. This would not only allow for greater differentiation among countries by taking into account their specific public debt challenges, but it would also provide tangible incentives for growth-friendly reforms and investment.

Keywords: housing market; macrofinancial linkages; euro area (search for similar items in EconPapers)
Date: 2023
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