Filling the sustainability gap in the EU after the crisis

Most countries in the European Union are facing a structural deterioration of their public budget as a result of the financial and economic crisis. The European Commission (2009) projects an average structural deficit for 2010 of 4.7% for the euro area and a corresponding figure of 5.5% for the entire EU. 2 Actual deficits are generally higher due to the negative output gaps. Greece, Ireland, Portugal, Spain and the UK all feature double digit deficit figures. Further, virtually all EU countries are on exploding debt paths if policies do not change. By 2060, Greece, Latvia and Ireland would all have debt ratios of over 800% of GDP, a number that in reality would of course never be reached as those countries would be forced into default long before reaching those levels. While sustainability gaps were already positive before the current crisis, the crisis has magnified them further.
In this paper, based on the European Commission’s (2009) Sustainability Report we present the sustainability gap for different EU countries and discuss the future development of the various age-related spending categories. In particular, we distinguish spending on pensions, healthcare including long-term care and unemployment benefits/education.