Inderscience Publishers

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

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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

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