Assessing public debt sustainability: some insights from an EU perspective into an inexorable question

The 2010-12 euro area sovereign debt crisis revealed severe debt vulnerabilities in a number of European countries. In response, international institutions have considerably strengthened the frameworks they use to assess debt sustainability. In the EU, since 2012, the European Commission has started to closely monitor and assess on a regular basis Member States? debt sustainability, as part of the EU?s overall economic surveillance framework. This article takes stock of the difficulties inherent in debt sustainability analysis (DSA), as shown by the last financial crisis, and describes some important (recent and ongoing) methodological advances in DSA frameworks. Challenges include the difficulty to distinguish in real time liquidity crises from solvency problems, current debates on appropriate debt threshold levels and debt burden indicators, and striking the right balance between breadth of analysis and the need for concise and clear conclusions. The recent and ongoing changes made to DSA frameworks include the development of probabilistic tools, a greater consideration of feedback effects, the increasingly broad range of fiscal risks examined, and a greater focus on the institutional dimension of debt sustainability.