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Fiscal sustainability and policy implications for the euro area

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Author Info

  • Fabrizio Balassone

    ()
    (Banca d'Italia)

  • Jorge Cunha

    ()
    (Banco de Portugal)

  • Geert Langenus

    ()
    (National Bank of Belgium, Research Department)

  • Bernhard Manzke

    ()
    (Deutsche Bundesbank)

  • Jeanne Pavot

    ()
    (Banque de France)

  • Doris Prammer

    ()
    (Oesterreichische Nationalbank
    European Commission)

  • Pietro Tommasino

    ()
    (Banca d'Italia)

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.

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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 155.

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Length: 45 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:nbb:reswpp:200901-21

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

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Cited by:
  1. Jean-Claude Trichet, 2010. "Luncheon address: central banking in uncertain times: conviction and responsibility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 243-266.
  2. Rossana Merola & Douglas Sutherland, 2013. "Fiscal Consolidation and the Implications of Social Spending for Long-Term Fiscal Sustainability," Review of Economics and Institutions, Università di Perugia, vol. 4(3).
  3. Bonin, Holger & Patxot, Concepció & Souto, Guadalupe, 2013. "Cyclically neutral generational accounting," ZEW Discussion Papers 13-099, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Axel H. Börsch-Supan, 2012. "Entitlement Reforms in Europe: Policy Mixes in the Current Pension Reform Process," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 405-435 National Bureau of Economic Research, Inc.
  5. Axel H. Börsch-Supan, 2012. "Entitlement Reforms in Europe: Policy Mixes in the Current Pension Reform Process," NBER Working Papers 18009, National Bureau of Economic Research, Inc.
  6. International Monetary Fund, 2010. "Some Uncomfortable Arithmetic Regarding Europe’s Public Finances," IMF Working Papers 10/177, International Monetary Fund.
  7. Klaus Weyerstrass & Reinhard Neck, 2013. "A young EU member’s ageing: budgetary and macroeconomic consequences of Slovenia’s demographic prospects," Empirica, Springer, vol. 40(3), pages 427-456, August.
  8. Christophe Van Nieuwenhuyze, 2013. "Debt, assets and imbalances in the euro area. An aggregate view," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(1), pages 123-152.
  9. Torben M. Andersen & Marias H. Gestsson, 2010. "Longevity, Growth and Intergenerational Equity - The Deterministic Case," Economics wp52, Department of Economics, Central bank of Iceland.
  10. Claudia M�nch & Sweder van Wijnbergen, 2009. "Education and Labor Market Activity of Women: An Age-Group Specific Empirical Analysis," Tinbergen Institute Discussion Papers 09-099/2, Tinbergen Institute.

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