Fiscal Conditions for Growing out of Debt in Europe
Fiscal Conditions for Growing out of Debt in Europe

Summary/Abstract: Sovereign debt crisis in the euro zone put in the spotlight the issue of restoring the balance in the public finances of indebted countries as to resorte their capacity to borrow again on financial markets. Restoring fiscal balance will be a difficult task due to poor economic outlook in most EU countries, particularly in the euro area. The attempts to accelerate economic growth by means of an active fiscal policy will be limited by high level of public debt and efforts on fiscal consolidation in the most indebted countries. Current low cost of debt service is the result of highly expansive monetary policy of European Central Bank. However, if interest rates start to rise, several euro zone countries once again might find themselves in the face of insolvency. In the long term, the fiscal consolidation process will be hindered due to unfavorable demographic trends and resulting growth in age-related spending. The simple arithmetic of government balance and public debt indicates that the process of growing out of debt must be based primarily on the forming and maintenance of sufficient primary surplus. The financial and economic crisis, which then turned into a sovereign debt crisis in the euro zone, is the final proof of the need to return to fiscal discipline.

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