Fiscal stimulus was needed to support economy, but overall success depends on a credible exit strategy
The report reviews how Member States are tackling the challenges from the financial and economic crisis. It assesses the prospects for public finances and policy needs ahead based on past experiences with financial crises. It finds that quick, resolute and comprehensive policy responses in the financial sector, together with an exit strategy of timely unwinding government interventions can contain the costs. In addition to the direct fiscal costs of interventions in the financial sector, large fiscal deficits and low economic growth rates lead to sharp increases in government debt ratios.
As the European economy suffers its worst post-war recession, the European Recovery Plan provides needed fiscal support to ailing economies. But rising public debts and the contingent liabilities incurred by governments to support the financial sector, together with the prospected increases in age-related expenditure and slowdown in potential growth raise concerns about public finance sustainability. An exit strategy strengthening fiscal policy frameworks, reforming age-related spending and spelling out the broad consolidation measures envisaged when the recovery has taken hold is required to address these concerns and underpin consumer, business and financial market confidence, the 2009 Report on public finances shows.
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