Debt Sustainability Revisited

After a decade’s experience for the EMU and based on ongoing fiscal consolidation plans, a comparative evaluation exercise was conducted for the sustainability of public debt dynamics and that of fiscal policies pursued in Germany, the Netherlands and Finland (fiscally prudent economies), against those in Greece, Ireland and Portugal (economies in fiscal distress). Standard debt sustainability analysis (based on the government’s inter-temporal solvency condition) was complemented with a range of short and medium term sustainability indicators. In addition, a synthetic-recursive fiscal sustainability indicator, utilized to assess the sustainability of past fiscal policies, provided corroborative evidence for the fact that the policies pursued so far, generated unsustainable and divergent fiscal outcomes for the economies in the second group, in contrast to the economies in the first group. Overall, the findings suggest that current fiscal policies are on an unsustainable trajectory for the economies in fiscal distress. Although all economies considered in this study need to embark on a course of fiscal adjustment to some extent, this adjustment seems like a daunting fiscal exercise for the economies which face severe budget imbalances. Furthermore, based on a number of macro-fiscal and indebtedness indicators, the analysis also reveals pronounced asymmetries in performance between the two groups. In terms of convergence, the results indicate that progress in achieving the Maastricht objectives has been slow, partial and fragmented and observed only in a small number of EMU economies, which unlike the rest of the economies examined in the study, were not characterized by asymmetric macroeconomic disequilibria.