Assessing public debt sustainability in EU member states:a guide

The aim of this paper is to illustrate the methodological approach used by the Commission services (DG ECFIN/C2) to carry out, in a systematic and harmonised way, public debt sustainability analysis (DSA) for EU Member States. Analysing recent and prospective public debt developments and risks to debt sustainability is crucial for EA countries and the EU as a whole to be able to formulate appropriate policy responses. To this aim, the Commission services (DG ECFIN) prepare on a regular basis (twice a year, following autumn and spring Commission forecasts) an internal "Debt Sustainability Monitor" report (DSM) presenting, for each Member State, a detailed public debt sustainability analysis, accompanied by the analysis of fiscal sustainability indicators. The DSM provides key information for regular budgetary surveillance. The assessment of Member States' debt developments is indeed a key component of fiscal surveillance under the Stability and Growth Pact, the European semester and the Europe 2020 strategy. Public debt dynamics is analysed in the DSM through traditional (deterministic) debt projections, accompanied by sensitivity analysis, and stochastic debt projections. Brand new tools have also been introduced in the DSA framework with the aim of ensuring a more comprehensive assessment of risks to public debt sustainability (capturing risks arising, for instance, from the structure of public debt financing and from governments' contingent liabilities). Other new tools have been introduced to make it possible to assess the realism of underlying macroeconomic assumptions. Main features of the renewed Commission's DSA framework are the following: 1) Criteria are used to identify "vulnerable" countries from the point of view of public debt sustainability. For the latter, the DSA is "enhanced" with a detailed write-up, in which the macro-fiscal assumptions used in the projections are illustrated and debt projection results, and risks to debt sustainability more broadly, are discussed. 2) The framework is designed ...