Long-term sustainability of public finances in the European Union

In the coming decades, the size and age-structure of Europe's population will undergo dramatic demographic changes. Ageing populations will pose major economic, budgetary and social challenges. It is expected to have a significant impact on growth and lead to significant pressures to increase public spending. This will make it difficult for Member States to maintain sound and sustainable public finances in the long-term. This is of particular importance in Economic and Monetary Union, as high deficits and rising debt in some countries leading to unsustainable public finances might have an adverse impact on macro-economic conditions for other EMU countries.

This report, adopted by the Commission on 12 October 2006, is the first one dedicated exclusively to the long-term sustainability of public finances. This is an important part of the multilateral budgetary surveillance by the Commission and the Council. Ensuring progress towards fiscal sustainability was emphasized and reaffirmed by the Council in the reform of the Stability and Growth Pact in 2005. It responds to the February 2006 invitation of the Council to undertake a comprehensive assessment of the sustainability of public finances in the Member States by the end of 2006.

The analysis in the report concludes that on current policies the government debt in the EU will increase very significantly over the coming decades. Coping with these prospects require a broad-based approach consisting of fiscal consolidation and broad structural reforms. Implementing a durable structural budgetary adjustment will contribute very significantly to improving fiscal sustainability. If Member States reach their medium-term objectives, the sustainability challenge will be significantly reduced. However, this is not sufficient. The debt/GDP ratio would still be above the 60% reference value in more than two thirds of the Member States in 2050.

The report also assesses risks to the long-term sustainability for the EU Member States. Overall, six countries are assessed to be at high risk (the Czech Republic, Greece, Cyprus, Hungary, Portugal and Slovenia), ten at medium risk (Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, Malta, Slovakia and the United Kingdom) and nine at low risk (Denmark, Estonia, Latvia, Lithuania, the Netherlands, Austria, Poland, Finland and Sweden).

European Commission: DG Economic and Financial Affairs: Publications: European Economy News, No.4, October 2006, p6-8: Out of the red and into the grey http://ec.europa.eu/economy_finance/een/pdf/een_004_en.pdf

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