European Economy. Public Finances in EMU-2010. European Economy 2010.4

Abstract

The financial crisis has had a large impact on the public finances of the European economies. With output no longer shrinking since mid-2009 and a tentative recovery seemingly underway, the focus is turning to the legacy the recession has left for the public finances. Events in Spring 2010 have exposed the urgency of addressing the fiscal challenge in the euro area and the EU, as the high and rising public debts raised concerns on governments' solvency. The unravelling of the Greek crisis induced financial distress in other Member States as sovereign risk premia shot up to levels unprecedented in EMU in Member States with perceived high budgetary and macro-financial risks. Following the market tensions in sovereign debt markets and financial support to Greece and an agreement to set up a European Financial Stabilisation Mechanism, the Council on 9 May 2010 strongly committed to ensuring fiscal sustainability and enhanced economic growth in all Member States and agreed that plans for fiscal consolidation and structural reforms will be accelerated, where warranted.