Signalling fiscal stress in the euro area: A country-specific early warning system

The sovereign debt crisis in the euro area has raised interest in early warning indicators, aimed at signalling the build-up of fiscal stress in advance and helping prevent crises by means of a timely counteraction of fiscal and macroeconomic policies. This paper presents possible improvements to enhance existing early warning indicators for fiscal stress, especially for the euro area. We show that a country-specific approach could strongly increase the signalling power of early warning systems. Finally, we draw policy conclusions for the setting-up and application of a system of early warning indicators for fiscal stress.