European integration and financial crisis: causes, implications and policy directions

The paper reviews the impact of the recent global financial crisis for fiscal policy. As signs of economic recovery emerge and consolidate at the global level and countries prepare plans to exit from the exceptional fiscal stimulus, the paper reviews the cost of the crisis for public finances and the size and nature of the intervention undertaken by G-20 countries and Asian governments. The crisis left its most visible impact on public finances in advanced economies, although emerging market economies have also been hit hard. Dealing with the consequences of large structural deficits and the build-up of public debt will dominate fiscal policy decisions well into the next decade. The paper, therefore, assesses the growth momentum at present, as well as the outlook for structural balances and public debt, the potential consequences of high debt levels, and the extent of adjustment needed to achieve fiscal sustainability. The policy implications are different for advanced and emerging market economies, including in Asia. While most mature and some emerging market countries with high public debt will need to undertake a credible fiscal consolidation over the next several years, fiscal policy may need to be restrictive in countries with moderate debt pressures to contain the negative implications of emerging capital inflows.