Public Finances in EMU-2008. THE ROLE OF QUALITY OF PUBLIC FINANCES IN THE EU GOVERNANCE FRAMEWORK

Abstract

On the back of favourable economic conditions as well as consolidation and reform efforts, public finances have improved significantly in the EU and the euro area. Although differences remain large across countries, in 2007 the government deficit in the euro area and in the EU as a whole reached the lowest level since the early 1970s, respectively 0.6% and 0.9% of GDP. Reflecting the improvement of fiscal balances, the level of outstanding debt stayed on a clear downward path. In the EU as a whole it has already fallen to below 60% of GDP, while in the euro area it is approaching this reference value. Despite this progress, EU Member States are still facing a number of major challenges that leave little room for complacency on fiscal policies. First and foremost, potential GDP growth is still constrained in many Member States, reflecting an inefficient use of resources, including by the public sector. At the same time, the current economic juncture with strong inflationary pressures is reducing the room for manoeuvre in the conduct of policies. Second, the ongoing process of demographic ageing will weigh on the sustainability of public finances unless the consolidation process is continued and accompanied by structural reforms that reduce its budgetary cost. And third, increasing exposure to global competition puts pressure on EU governments to lower the, on average, relatively high tax, administrative and regulatory burden in Europe and to improve provision of public services and goods, so as to deliver much-requested better value for money.