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Jürgen Matthes / Björn Kauder / Samina Sultan in Martens Centre for European Studies External Publication 5. June 2023 Reforming Economic and Monetary Union: Balancing Spending and Public Debt Sustainability

Fiscal policy in the EU faces the dilemma of having to meet large spending needs despite the existence of elevated public debt ratios. Fiscal policy therefore needs to put the member states on a sustainable path to gradual debt reduction.

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External Publication
Balancing Spending and Public Debt Sustainability
Jürgen Matthes / Björn Kauder / Samina Sultan in Martens Centre for European Studies External Publication 5. June 2023

Reforming Economic and Monetary Union: Balancing Spending and Public Debt Sustainability

German Economic Institute (IW) German Economic Institute (IW)

Fiscal policy in the EU faces the dilemma of having to meet large spending needs despite the existence of elevated public debt ratios. Fiscal policy therefore needs to put the member states on a sustainable path to gradual debt reduction.

The Stability and Growth Pact (SGP) is the decisive mechanism in the EU to ensure that this is the case. The European Commission’s proposal to reform the SGP is, in theory, a step in the right direction. However, it has some major practical shortcomings: among others, it permits a long adjustment period and grants considerable political discretion to the European Commission. To seize the theoretical opportunities the reform offers, the proposal needs to be depoliticised. To this end, independent institutions should have a more important role. Moreover, common quantitative benchmarks should be introduced as safeguards to limit the political discretion allowed. With a basic public debt sustainability analysis, we find that even in the baseline scenario the public debt ratio is likely to increase in some big member states such as France. In our two more pessimistic scenarios most member states analysed would see their public indebtedness rise, with the notable exceptions of Greece and Portugal. In such a situation, a sovereign debt crisis could arise. In this case there would not be sufficient capacity to meet the transformative spending required in the years ahead. A sound reform of the SGP is therefore a vital building block when considering how to square the circle of high public expenditure needs with the existing high public debt ratios.

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External Publication
Balancing Spending and Public Debt Sustainability
Jürgen Matthes / Björn Kauder / Samina Sultan in Martens Centre for European Studies External Publication 5. June 2023

Reforming Economic and Monetary Union: Balancing Spending and Public Debt Sustainability

German Economic Institute (IW) German Economic Institute (IW)

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