Sustainability of Government Debt in the EU

Arjan Lejour, Jasper Lukkezen and Paul Veenendaal

MPRA Paper from University Library of Munich, Germany

Abstract: This paper addresses the sustainability of government debt in Europe and is motivated by the recent debt increases following the crisis. We evaluate the sustainability in a time frame of ten years in which governments will be able to implement budget rules to get budget deficits under control. We develop a fiscal sustainability model for selected EMU member states that uses stochastic inputs based on historic data, closely following van Wijnbergen’s (van Wijnbergen and Budina, 2008) approach. We simulate the development of government debt as a percentage of GDP and show its expectation value including a confidence interval for a member state conditional on deficit reduction scenarios and the behaviour of other EMU member states. Using OECD projections as a baseline, we find that without additional fiscal consolidation and taking into account the public costs of ageing until the end of the projection period, budget deficits in all selected EMU countries will rise and sovereign debt is not sustainable, apart from Belgium. Even ignoring the cost of ageing, consolidation of sovereign debt is necessary for nearly all EMU countries. The consolidation proposed by the OECD would eliminate the doubts on sustainability of Belgium, Dutch, German, Italian, Portuguese and French bonds. For Ireland, Greece and Spain additional actions are required on top of the consolidation in the OECD projections. Together with a review of spillovers and stress-tests performed with our model we conclude that coordination of fiscal policies in the EMU is necessary.

Keywords: EU; government debt; cross border spillovers; euro (search for similar items in EconPapers)
JEL-codes: E52 E6 H63 H71 (search for similar items in EconPapers)
Date: 2010-06-07, Revised 2010-06-07
New Economics Papers: this item is included in nep-cmp, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Chapter: Sustainability of Government Debt in the EMU (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:30139

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