While a process of consolidation is underway in the EU, the debt to GDP ratio is continuing to rise and is set to reach 83.3% of GDP in 2012 – an increase of over 20 points of GDP from its level of 2007. The consolidation measures that have been introduced are addressing this rising level, and the Member States have indicated plans to intensify these in their Stability and Convergence Programmes. Following through on these plans would lead to debt stabilising by 2012; the challenge is therefore to ensure that these more ambitious plans are indeed put into practice while preserving appropriate differentiation across Member States in accordance with available fiscal space.
The second part of the report presents the EU response to the lessons of the fiscal crisis, the legislative package that contains six pieces, of which four relate to budgetary policy. The reform will introduce an expenditure rule into the preventive arm of the Pact, and will make the debt criterion operational in the corrective arm, while introducing sanctions to the preventive arm for the first and intensifying those in the corrective arm.
The third part of the report illustrates the link between budgetary frameworks and sovereign spreads. It shows the impact of fiscal governance procedures on markets' perception of countries' sustainability risk. The results confirm the idea that alongside the level of the deficit and debt, a higher quality of fiscal rules is linked with a lower yield spread. Countries with the highest deficits and debt have the most to gain from an improvement in their fiscal governance in terms of a reduction in their spreads.
Finally, the report shows the importance of macro-financial financial imbalances in fiscal vulnerabilities and the relevance of regulatory reforms in the banking sector to reduce threats. The analysis also shows that EU countries are currently making historically large fiscal consolidation efforts, and assesses the cost in terms of future GDP of consolidating public finances via increased taxation.