Title: Fiscal sustainability and policy implications: a post-crisis analysis for the euro area

Authors: Fabrizio Balassone, Jorge Cunha, Geert Langenus, Bernhard Manzke, Jeanne Pavot, Doris Prammer, Pietro Tommasino

Addresses: Banca d'Italia, Via Nazionale, 91, Rome 00184, Italy. ' Department of Economic Research, Banco de Portugal, Av. Almirante Reis, 71, Lisbon 1150-012, Portugal. ' Department of Research, National Bank of Belgium, Boulevard de Berlaimont 14, Brussels 1000, Belgium ' Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, Frankfurt/Main 60431, Germany. ' Banque de France, 31 Rue Croix des Petits Champs, Paris 75001, France. ' Oesterreichische Nationalbank, Otto Wagner Platz 3, Vienna 1090, Austria. ' Banca d'Italia, Via Nazionale, 91, Rome 00184, Italy

Abstract: In this paper, we examine the sustainability of euro area public finances against the backdrop of population ageing after the 2008–2009 recession. We argue that ageing costs may be higher than projected by the Working Group on Ageing Populations (AWG) of the EU|s Economic Policy Committee, consider alternative indicators to quantify sustainability gaps for euro area countries and assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon lifetime contributions to the government|s primary balance of different generations suggests that an important pre-funding of ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate manner to future generations. For many euro area countries this implies that the medium-term targets defined in the context of the revised Stability and Growth Pact would ideally need to be revised upwards to obtain significant surpluses.

Keywords: population ageing; fiscal sustainability; generational accounting; medium-term objectives; fiscal policy; financial crisis; sustainable development; public finances; demographic change; euro area; Stability and Growth Pact; SGP.

DOI: 10.1504/IJSE.2011.039441

International Journal of Sustainable Economy, 2011 Vol.3 No.2, pp.210 - 234

Published online: 05 Apr 2011 *

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