Fiscal Sustainability and Policy Implications for the Euro Area

46 Pages Posted: 2 Feb 2009

See all articles by Fabrizio Balassone

Fabrizio Balassone

Bank of Italy

Geert Langenus

National Bank of Belgium

Bernhard Manzke

Deutsche Bundesbank

Jeanne Pavot

Banque de France

Doris Prammer

European Commission

Pietro Tommasino

Bank of Italy

Jorge Cunha

Banco de Portugal

Multiple version iconThere are 5 versions of this paper

Date Written: December 5, 2008

Abstract

In this paper we examine the sustainability of euro area public finances against the backdrop of population ageing. We critically assess the widely used projections of the Working Group on Ageing Populations (AWG) of the EU's Economic Policy Committee and argue that ageing costs may be higher than projected in the AWG reference scenario. Taking into account adjusted headline estimates for ageing costs, largely based upon the sensitivity analysis carried out by the AWG, we consider alternative indicators to quantify sustainability gaps for euro area countries. With respect to the policy implications, we assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon the lifetime contribution to the government's primary balance of different generations suggests that an important degree of pre-funding of the ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate way 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 significant surpluses.

Keywords: population ageing, fiscal sustainability, generational accounting, medium-term objectives for fiscal policy

JEL Classification: H55, H60

Suggested Citation

Balassone, Fabrizio and Langenus, Geert and Manzke, Bernhard and Pavot, Jeanne and Prammer, Doris and Tommasino, Pietro and Cunha, Jorge, Fiscal Sustainability and Policy Implications for the Euro Area (December 5, 2008). ECB Working Paper No. 994. Available at SSRN: https://ssrn.com/abstract=1311802

Fabrizio Balassone

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Geert Langenus (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Bernhard Manzke

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Jeanne Pavot

Banque de France ( email )

Paris
France

Doris Prammer

European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Pietro Tommasino

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Jorge Cunha

Banco de Portugal ( email )

Av. Almirante Reis, 71
Lisbon, 1150-012
Portugal
+351213128358 (Phone)

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