The negative impact of the recession on European Union public finances is small compared with what the ageing of the EU population will do to budgets unless governments take action, the European Commission said.
In a report on the sustainability of public finances in the 27-nation bloc, the EU executive said that to avoid a debt spiral EU countries must not only slash deficits, but also boost employment and reform pension and healthcare systems.
“In the absence of an ambitious effort to consolidate government accounts and structural reforms, there would be unbearable increases in debt interest and pension expenditure, as well as on healthcare and long-term care during the coming decades,” the report said.
Because of a rise in public spending caused by the worst economic downturn since World War Two and discretionary fiscal stimulus, the EU budget deficit soared from 0.8 percent of GDP in 2007 to 6 percent seen this year and 7 percent seen in 2010.
In the three years to 2010, the gross debt ratio for the EU as a whole is expected to increase by more than 20 points to almost 80 percent.
“Though the debt and deficit increases are by themselves quite impressive, the projected impact on public finances of ageing populations is anticipated to dwarf the effect of the crisis many times over,” the Commission said.
“The fiscal costs of the crisis and of projected demographic development compound each other and make fiscal sustainability an acute challenge,” it said.
The Commission said that Bulgaria, Denmark, Estonia, Finland and Sweden were relatively in the best position, with stronger budgetary positions and comprehensive pension reforms undertaken in recent years.
“Their structural fiscal positions remain sounder than in most other EU countries and present, therefore, a low long term risk,” it said.
Belgium, Germany, France, Italy, Hungary, Luxembourg, Austria, Poland and Portugal were very different in terms of their initial budgetary position and age-related expenditure, but in general, the Commission classified the group as at medium risk to the long term sustainability of finances.
The Czech Republic, Cyprus, Ireland, Greece, Spain, Latvia, Lithuania, Malta, the Netherlands, Romania, Slovenia, Slovakia and the United Kingdom were in the worst situation.
“In nearly all of these countries, the sustainability gaps are the result of a very large projected increase in age-related expenditure, compounded in most cases by large initial imbalances, and hence they are exposed to a higher long term risk,” the Commission report said.
“This indicates that closing their gaps will require both ambitious consolidation programmes that reduce debts and deficits in the coming years, and profound reforms of social protection,” it said.
The Commission said this was particularly the case for Greece, which faced the second highest increase in age-related expenditure of the entire EU, while its very high debt ratio added to the concerns on sustainability.
“The possible continuing effects of the crisis on the budgetary position and on medium-term growth are a serious concern for most of the high risk countries – in particular, Ireland, Greece, Latvia, Spain and United Kingdom – for whom avoiding a very fast increase in debt ratios is a policy challenge already in a medium-term perspective,” it said.