국가전략정보포털

Title page

Contents

Acknowledgements 4

Executive summary 13

Introduction 31

1. PUBLIC FINANCES IN THE WAKE OF THE COVID-19 CRISIS 31

2. THE COMMISSION FISCAL SUSTAINABILITY ANALYSIS FRAMEWORK 32

Part I. Fiscal sustainability analysis 38

1. SHORT-TERM FISCAL SUSTAINABILITY ANALYSIS 39

1.1. SHORT-TERM FISCAL SUSTAINABILITY INDICATOR: THE S0 INDICATOR 39

1.2. SHORT-TERM GROSS FINANCING NEEDS 43

1.3. SOVEREIGN FINANCING CONDITIONS 47

2. MEDIUM-TERM FISCAL SUSTAINABILITY ANALYSIS 54

2.1. DETERMINISTIC GOVERNMENT DEBT PROJECTIONS 55

2.2. STOCHASTIC GOVERNMENT DEBT PROJECTIONS 62

2.3. MEDIUM-TERM GOVERNMENT GROSS FINANCING NEEDS 63

2.4. THE S1 INDICATOR 64

2.5. OVERALL MEDIUM-TERM RISKS 68

3. LONG-TERM FISCAL SUSTAINABILITY ANALYSIS 83

3.1. AGEING COST PROJECTIONS 84

3.2. THE S2 INDICATOR 86

3.3. OVERALL LONG-TERM RISKS 91

4. ADDITIONAL AGGRAVATING AND MITIGATING RISK FACTORS 97

4.1. RISKS RELATED TO THE GOVERNMENT DEBT STRUCTURE 98

4.2. LOOKING BEYOND 'GOVERNMENT DEBT': RISKS RELATED TO GOVERNMENT OTHER DIRECT AND CONTINGENT LIABILITIES 102

4.3. GOVERNMENT ASSETS AND NET DEBT 111

Part II. Special issues 119

1. INCORPORATING THE NEXTGENERATIONEU IN THE DSA FRAMEWORK 120

1.1. NGEU FROM A DSA PERSPECTIVE 121

1.2. DEBT IMPACT CHANNELS 122

1.3. NGEU INCORPORATION IN THE DSA 124

1.4. GDP GROWTH PROJECTIONS BEFORE AND AFTER THE INCLUSION OF NGEU INVESTMENTS 126

2. STRESS TESTS ON THE FISCAL IMPACT OF EXTREME WEATHER AND CLIMATE-RELATED EVENTS 133

2.1. INTRODUCTION 134

2.2. STRESS TESTS ON THE FISCAL IMPACT OF EXTREME WEATHER AND CLIMATE-RELATED EVENTS 139

2.3. CONCLUSION 155

3. 'R-G' DIFFERENTIALS: LATEST DEVELOPMENTS AND IMPLICATIONS FOR PUBLIC DEBT SUSTAINABILITY 159

3.1. INTRODUCTION 159

3.2. OVERVIEW OF THE LITERATURE 160

3.3. STYLISED FACTS ABOUT 'R-G' DIFFERENTIALS AND DEBT DYNAMICS IN THE EU 162

3.4. IMPLICATIONS OF A CORRECTION OF 'RG' DIFFERENTIALS FOR DEBT SUSTAINABILITY RISKS 170

Annex A1. Fiscal sustainability analysis: the Commission's framework 174

A1.1. THE APPROACH USED TO ASSESS SHORT-TERM RISKS 174

A1.2. THE APPROACH USED TO ASSESS MEDIUM-TERM RISKS 174

A1.3. THE APPROACH USED TO ASSESS LONG-TERM RISKS 177

A1.4. OVERVIEW OF THE THRESHOLDS USED TO ASSESS FISCAL SUSTAINABILITY RISKS 177

Annex A2. The early-detection indicator of fiscal stress risk (S0) 180

A2.1. THE METHODOLOGY FOR THE CALCULATION OF THE THRESHOLDS 180

A2.2. THE CALCULATION OF THE COMPOSITE INDICATOR S0 181

Annex A3. Decomposing the debt dynamic, projecting the interest rate on government debt and property incomes 182

A3.1. DECOMPOSING THE DEBT DYNAMICS 182

A3.2. PROJECTING THE IMPLICIT INTEREST RATE ON GOVERNMENT DEBT 183

A3.3. TECHNICAL OVERVIEW OF THE T+10 METHODOLOGY 185

A3.4. PROPERTY INCOME 186

Annex A4. Stochastic debt projections based on a historical variance-covariance matrix 189

A4.1. THE METHOD TO OBTAIN (ANNUAL) STOCHASTIC SHOCKS TO MACROECONOMIC VARIABLES 189

A4.2. APPLYING STOCHASTIC SHOCKS TO THE CENTRAL SCENARIO 190

A4.3. THE DEBT EVOLUTION EQUATION 190

A4.4. THE DATA USED 191

Annex A5. The fiscal sustainability indicators (S1 and S2) 192

A5.1. NOTATION 192

A5.2. DEBT DYNAMICS 192

A5.3. DERIVATION OF THE S1 INDICATOR 192

A5.4. DERIVATION OF THE S2 INDICATOR 193

Annex A6. Estimating the potential impact of simulated bank losses on public finances based on the SYMBOL model 197

Annex A7. Statistical annex: cross-country tables 204

A7.1. SHORT-TERM FISCAL SUSTAINABILITY CHALLENGES 205

A7.2. MEDIUM-TERM FISCAL SUSTAINABILITY CHALLENGES 211

A7.3. LONG-TERM FISCAL SUSTAINABILITY CHALLENGES 221

References 222

Table 1. Fiscal sustainability risk classification by Member States (in brackets, risk classification in the DSM 2020 whenever the risk classification has changed) 20

Table 2. Summary heat map of fiscal sustainability challenges 21

Table 3. Fiscal sustainability challenges in EU Member States 22

Table I.1.1. Fiscal variables used in the S0 indicator, 2021 42

Table I.1.2. Financial-competitiveness variables used in the S0 indicator, 2021 42

Table I.1.3. Gross Financing Needs, (2019-2023), by country 43

Table I.1.4. Gross Financing Needs Components, 2021 estimations, by country 44

Table I.1.5. Government GFN and possible total acquisitions of sovereign bonds by the Eurosystem, 2021 and 2022 estimates, by country 46

Table I.1.6. Long-term foreign currency sovereign ratings (at November 2, 2021) 49

Table I.2.1. Overview of S1, DSA and overall medium-term risk classifications 54

Table I.2.2. Debt projections in the deterministic scenarios 55

Table I.2.3. S1: breakdown 65

Table I.2.4. Baseline debt projections in the 2020 DSM and the 2021 FSR 70

Table I.2.5. Main baseline assumptions in the 2020 DSM and the 2021 FSR (2023-2031 averages) 70

Table I.2.6. Medium-term risk classifications in the 2020 DSM and the 2021 FSR 71

Table I.2.7. Heat map of medium-term fiscal sustainability risks in EU countries 73

Table I.3.1. Overview of S2, DSA and overall long-term risk classifications 83

Table I.3.2. Ageing costs - baseline, pps of GDP change 2019-2070 84

Table I.3.3. Ageing costs - baseline and sensitivity scenarios, pps of GDP change 2019-2070 86

Table I.3.4. S2 - breakdown, pps of GDP 87

Table I.3.5. S2, DSA and overall long-term risk classification 91

Table I.3.6. Comparison of long-term risk classifications 92

Table I.4.1. Risks related to the government debt structure, by country (2020) 98

Table I.4.2. Average (residual) maturity of debt, general government, by EU country 99

Table I.4.3. Potential triggers for contingent liabilities from the banking sector, by country 106

Table I.4.4. Implicit contingent liabilities from banks' excess losses and recapitalisation needs, under alternative scenarios (% GDP 2020) 111

Table I.4.5. Theoretical probabilities of public finances being hit by more than 3% of GDP, in the event of a severe crisis (i.e. involving excess... 111

Table II.2.1. Some instances of fiscal impacts from natural disasters 141

Table II.2.2. Selected major extreme events and associated economic losses, by country, type, and year 146

Table II.2.3. Factor increase (FI) in economic losses for the 1.5℃ and 2℃ warming scenarios, by midcentury, regional aggregates 147

Table II.2.4. Factor increase (FI) in economic losses for the 1.5℃, 2℃, and 3℃ warming scenarios, by the end of the century, regional aggregates 148

Table II.2.5. Assumed direct fiscal impact of a one-off extreme event, by country and warming targets (1.5℃ and 2℃), applied in 2024 151

Table II.2.6. Debt-to-GDP projections of selected countries, baseline versus 1.5℃ and 2℃ warming scenarios 153

Table II.3.1. Debt ratio dynamics, breakdown by component, different period averages, % of GDP, EA, EU and groups of countries with debt below... 168

Table II.3.2. Interest - growth rate differentials, baseline and adverse scenario (based on the implicit interest rate) 170

Table II.3.3. Projected debt levels in 2032, baseline and adverse 'r-g' scenario, % of GDP 171

Graphs

Graph 1. General government debt EA aggregate, developments and debt reduction episodes since 2000 31

Graph 2. Commission fiscal sustainability analysis framework at glance 32

Graph I.1.1. The S0 indicator for EU countries, 2009 and 2021 40

Graph I.1.2. Fiscal and financial-competitiveness subindices, 2009 and 2021 40

Graph I.1.3. Financial-competitiveness sub-index since 2009, CY and (other) EU simple average 41

Graph I.1.4. Short-term GFN vis-a-vis threshold, 2020 and 2021, EU countries 44

Graph I.1.5. 10-year government bond yield spreads to the German bund - EU and EA aggregates 47

Graph I.1.6. 10-year government bond yield spreads to the German bund - Selected countries 47

Graph I.1.7. Composite indicator of Systemic Stress (SovCISS) in euro area sovereign bond markets 48

Graph I.1.8. Sovereign debt ratings - EU and EA aggregates 48

Graph I.1.9. Countries posting a recent rating deterioration 48

Graph I.1.10. Countries with the lowest ratings as of January 2021 48

Graph I.2.1. Gross government debt baseline projections, EU and euro area 56

Graph I.2.2. Drivers of the change in debt under the baseline, EU 56

Graph I.2.3. Gross government debt projections for EU Member States under the baseline, 2021-2032 57

Graph I.2.4. Structural primary balance projected under the baseline and past observations 57

Graph I.2.5. 'Historical SPB' scenario: structural primary balance in 2023 and 2027 58

Graph I.2.6. Debt projections: 'historical SPB' scenario vs. baseline, EU and euro area 58

Graph I.2.7. Gross government debt projections under the 'historical SPB' scenario 58

Graph I.2.8. Structural primary balance in 2023-2032 in the baseline and the 'lower SPB' scenario 59

Graph I.2.9. Debt projections: 'lower SPB' scenario vs. baseline, EU and euro area 59

Graph I.2.10. Gross government debt projections under the 'lower SPB' scenario 59

Graph I.2.11. Interest-growth rate differential in the baseline and the 'adverse r-g' scenario, 2022-2032 averages 60

Graph I.2.12. Debt projections: 'adverse r-g' scenario vs. baseline, EU and euro area 60

Graph I.2.13. Gross government debt projections under the 'adverse r-g' scenario 60

Graph I.2.14. Impact of the 'financial stress' scenario on interest rates in 2022 61

Graph I.2.15. Debt projections: 'financial stress' scenario vs. baseline, EU and euro area 61

Graph I.2.16. Gross government debt projections for 2032, 'financial stress' scenario vs. baseline 61

Graph I.2.17. Debt projections: 'updated SCP' scenario vs. baseline, EU and euro area 62

Graph I.2.18. Structural adjustment and debt projections, 'updated SCP' scenario vs. baseline 62

Graph I.2.19. Stochastic debt projections, euro area, 2021-2026 63

Graph I.2.20. Stochastic debt projections for EU Member States 63

Graph I.2.21. General government gross financing needs and their drivers, baseline, EU 64

Graph I.2.22. General government gross financing needs under the baseline, 2023-2032 average 64

Graph I.2.23. S1: baseline results 65

Graph I.2.24. SPB level implied by S1 67

Graph I.2.25. Plausibility of the SPB implied by S1 67

Graph I.2.26. S1 under alternative scenarios - deviation from baseline, pps of GDP 68

Graph I.2.27. Comparison of S1 across recent Commission reports 71

Graph I.2.28. Breakdown of the change in S1 72

Graph I.3.1. S2 - baseline, pps of GDP 86

Graph I.3.2. S2 - required structural primary balance (SPB), % of GDP 88

Graph I.3.3. S2 - plausibility of the required SPB (% of cases achieved in the past) 88

Graph I.3.4. S2 - comparison to 2020 DSM, pps of GDP 88

Graph I.3.5. S2 - comparison across recent Commission forecasts 89

Graph I.3.6. S2 - deviation from baseline, pps of GDP 90

Graph I.4.1. Share of short-term debt (% of total general government debt) 99

Graph I.4.2. Average (residual) maturity of government debt (securities), simple average over EU countries 99

Graph I.4.3. Holders of government debt, 2020-Q4, market value 101

Graph I.4.4. Share of government debt held by (domestic) central banks, EA aggregate 100

Graph I.4.5. Debt and non-debt financial liabilities in EU Member States in 2020 102

Graph I.4.6. Trade credits and advances in selected Member States in 2011 and 2020 103

Graph I.4.7. Developments in government guarantees in selected EU Member States, 2010-2019 104

Graph I.4.8. Government guarantees and off-balance PPPs in EU Member States in 2019 104

Graph I.4.9. Stock of government guarantees, level and change 2020/19, by EU country 105

Graph I.4.10. Contingent liabilities linked to the financial sector interventions in the EU, 2008-2020 106

Graph I.4.11. Non-performing loans ratio (% of total loans), EU average and selected countries 107

Graph I.4.12. Gross debt, total liabilities, and financial assets in 2020 112

Graph I.4.13. Change in gross and net government debt ratio (pp. of GDP, 2009-20) 112

Graph II.1.1. RRF grants per Member State (% of pre-crisis country GDP 2019) 121

Graph II.1.2. 10 year government bond yields against German bonds 124

Graph II.1.3. Absorption of RRF grants up to 2023 (% of total allocation) 125

Graph II.1.4. Potential GDP compared to the previous report 127

Graph II.2.1. Global and European temperature anomalies, 1850-2019 134

Graph II.2.2. Global number of natural disasters, 1985-2020 135

Graph II.2.3. Global economic losses from natural disasters (Mls USD,m, current value), 1985-2020 136

Graph II.2.4. Long-term macroeconomic impacts of extreme weather and climate-related disasters 140

Graph II.2.5. Number of weather and climate-related disasters in the EU, by disaster subgroup, 1980-2020 142

Graph II.2.6. Weather and climate-related events, by disaster type, 1980-2020 142

Graph II.2.7. Geographical distribution (% EU total) of weather and climate-related events in the EU, per decade 143

Graph II.2.8. Increase in weather and climate-related disasters, by country, 2000-2020 143

Graph II.2.9. Number of weather and climate-related events, by disaster subgroup, 1980-1999 vs. 2000-2020 143

Graph II.2.10. Number of meteorological events, by disaster type and country, 2000-2020 143

Graph II.2.11. Number of hydrological events, by disaster type and country, 2000-2020 144

Graph II.2.12. Number of climatological events, by disaster type and country, 2000-2020 144

Graph II.2.13. Economic losses from extreme weather and climate-related events in the EU (% of total events), by disaster subgroup, 1980-2020 146

Graph II.2.14. Projected economic losses (EURb) by the end of the century, 1.5℃ scenario, by regional aggregate and disaster type 148

Graph II.2.15. Projected economic losses (EURb) by the end of the century, 2℃ scenario, by regional aggregate and disaster type 148

Graph II.2.16. Projected economic losses (EURb) by the end of the century, 3℃ scenario, by regional aggregate and disaster type 148

Graph II.2.17. Insurance coverage rate of extreme events, by disaster subgroup and country, 1980-2020 149

Graph II.2.18. Cumulated uninsured economic losses from extreme weather and climate-related events (% of country GDP), by country, 1980-2020 150

Graph II.2.19. Debt-to-GDP projections, baseline and climate scenarios, 2021-2032, Spain 153

Graph II.2.20. Debt-to-GDP projections, baseline and climate scenarios, 2021-2032, Czechia 153

Graph II.2.21. Debt-to-GDP projections, baseline and climate scenarios, 2021-2032, Hungary 154

Graph II.2.22. Economic and fiscal challenges from climate change 155

Graph II.3.1. EU interest rate-growth differential based on nominal implicit interest rate and nominal GDP growth, 2001-2021 163

Graph II.3.2. EU interest rate-growth differential based on nominal market long-term interest rate and nominal GDP growth, 2001-2021 163

Graph II.3.3. Interest-growth rate differential and public debt, average 2001-2021 (based on IIR) 165

Graph II.3.4. Interest - growth rate differential across economic periods and debt levels (based on IIR) 165

Graph II.3.5. Breakdown of 'r-g' differential across Member States, 2001-2021 (based on IIR) 165

Graph II.3.6. Dispersion of the interest-growth rate differential, distribution of EU countries (based on IIR) 166

Graph II.3.7. Dispersion of the interest-growth rate differential, distribution of EU countries (based on market long-term interest rates) 166

Graph II.3.8. Historical developments in the debt ratio, EA 167

Graph II.3.9. Debt ratio dynamics, breakdown by component, % of GDP, EA 167

Graph II.3.10. Impact of lower interest rates (-1 pp.) on the contribution of costs of ageing to the S2 indicator, selected countries, pps. of GDP 170

Boxes

Box 1. Deterministic debt projection scenarios: the main assumptions 35

Box I.1.1. S0 indicator: conceptual elements 50

Box I.1.2. Gross financing needs (GFN): Definition and measurement 52

Box I.2.1. Revising the inflation rate assumption: rationale, description and impact 74

Box I.2.2. Streamlined decision trees for the DSA risk classification 77

Box I.2.3. Possible paths to review the SFA projection assumptions 80

Box I.3.1. Methodology behind the long-term fiscal sustainability analysis 93

Box I.3.2. S2 - sensitivity scenarios: description and results 95

Box I.3.3. Possible future methodological revisions 96

Box I.4.1. Details on SYMBOL adjusted data: RWA, Guarantees and Moratoria 113

Box I.4.2. Gross and net debt: concepts and measures 117

Box II.1.1. NGEU adjusted T+10 medium term GDP growth estimates 128

Box II.1.2. NGEU impact in a stylised QUEST-based simulation 130

Box II.2.1. Overview of natural disaster databases 157

Box II.3.1. The 'r-g' differential and its importance for debt sustainability, relative to other factors: a snapshot of key concepts 172

Box Tables

Box I.1.1. S0 indicator: conceptual elements 51

Table 1. Thresholds and signalling power of S0 indicator, fiscal and financial-competitiveness sub-indices and individual variables 51

Box I.1.2. Gross financing needs (GFN): Definition and measurement 53

Table 1. GFN definition - Components and debt instruments included 53

Box I.2.1. Revising the inflation rate assumption: rationale, description and impact 76

Table 1. New versus previous inflation projection assumptions 76

Box I.2.3. Possible paths to review the SFA projection assumptions 82

Table 1. SFA projection based on the last forecast year 82

Box I.3.1. Methodology behind the long-term fiscal sustainability analysis 94

Table 1. Determination of overall long-term risk classification 94

Box I.3.2. S2 - sensitivity scenarios: description and results 95

Table 1. Sensitivity scenarios - results, pps of GDP 95

Box I.4.1. Details on SYMBOL adjusted data: RWA, Guarantees and Moratoria 113

Table 1. EBA stress test based adjustment of RWAs 113

Table 2. Data used for Guarantee-based adjustment of RWAs 114

Table 3. Data used for Moratoria-based adjustment of NPLs 115

Box II.2.1. Overview of natural disaster databases 158

Table 1. Overview of natural disaster databases 158

Box Graphs

Box I.2.1. Revising the inflation rate assumption: rationale, description and impact 75

Graph 1. Evolution of euro area market-based inflation expectation 75

Box I.2.2. Streamlined decision trees for the DSA risk classification 77

Graph 1. The new decision tree for all deterministic projections 78

Graph 2. The new decision tree for the overall DSA risk classification 79

Box I.2.3. Possible paths to review the SFA projection assumptions 80

Graph 1. Historical stylised facts on stock-flow adjustment across the EU 80

Graph 2. Debt-to-GDP projection, baseline and with SFA adjustment 82

Box I.4.1. Details on SYMBOL adjusted data: RWA, Guarantees and Moratoria 113

Graph 1. RWAs in 2018 compared to 2020 unadjusted data and EBA-adjusted data 113

Graph 2. Historical NPL Ratio (NPL over Gross Loans) 115

Graph 3. Impact of adjustment of NPL to account for delaying effect of moratoria 116

Box II.1.1. NGEU adjusted T+10 medium term GDP growth estimates 129

Graph 1. NGEU-adjusted medium-term GDP level path, for the EU and Latvia 129

Box II.1.2. NGEU impact in a stylised QUEST-based simulation 131

Graph 1. NGEU GDP impact in QUEST, EU aggregate 131

Graph 2. NGEU GDP impact in QUEST, EU countries 131

Graph 3. NGEU debt impact in QUEST, EU aggregate 132

Annex Tables

Table A1.1. Decision tree for the long-term risk classification 177

Table A1.2. DSA: thresholds for the deterministic projections 178

Table A1.3. DSA: thresholds for the stochastic projections 178

Table A1.4. Overview of thresholds used for the fiscal sustainability risk classification 179

Table A2.1. Possible cases based on type of signal sent by the variable at t-1 and state of the world at t 180

Table A6.1. Descriptive statistics of samples used for SYMBOL simulations 197

Table A6.2. Descriptive statistics for Non-Performing Loans (NPL) 198

Table A6.3. Leftover financial needs after each safety net tool (% of GDP 2020), under the short and long term scenarios 199

Table A6.4. Theoretical probability of public finances being hit by more than 3%, 5% or 10% of GDP, in the event of a severe crisis (i.e. involving... 201

Table A6.5. Detailed scenarios description 202

Table A7.1. S0 and sub-indexes heat map 205

Table A7.2. Fiscal variables used in the S0 indicator, 2021 206

Table A7.3. Financial-competitiveness variables used in the S0 indicator, 2021 207

Table A7.4. Risks related to the structure of public debt financing, by country (2020) 208

Table A7.5. Potential triggers for governments' contingent liabilities from the banking sector, by country 209

Table A7.6. Financial market information 210

Table A7.7. DSA heat map, by country 212

Table A7.8. Gross government debt projections and underlying macro-fiscal assumptions, European Union - Baseline 213

Table A7.9. Gross government debt projections and underlying macro-fiscal assumptions, euro area - Baseline 213

Table A7.10. Gross government debt projections and underlying structural fiscal effort under the baseline, by country 214

Table A7.11. Gross government debt projections and underlying structural fiscal effort under the 'historical SPB' scenario, by country 215

Table A7.12. Gross government debt projections and underlying structural fiscal effort under the 'lower SPB' scenario, by country 216

Table A7.13. Gross government debt projections and underlying structural fiscal effort under the 'adverse r-g' scenario, by country 217

Table A7.14. Gross government debt projections and underlying structural fiscal effort under the 'financial stress' scenario, by country 218

Table A7.15. Gross government debt projections and underlying structural fiscal effort under the 'updated SCP' scenario, by country 219

Table A7.16. S1 indicator, baseline and alternative scenarios, by country (pps. of GDP) 220

Table A7.17. S2, baseline and alternative scenarios, by country (pps. of GDP) 221

Annex Graphs

Graph A1.1. The multi-dimensional approach to assess fiscal sustainability risks 175

Graph A1.2. Decision tree for the assessment of overall medium-term fiscal sustainability risks 176

Graph A1.3. DSA, step 1: decision tree for the deterministic projections (including the baseline) 176

Graph A1.4. DSA, step 1: decision tree for the stochastic projections 176

Graph A1.5. DSA, step 2: decision tree for the overall DSA risk classification 177

Graph A6.1. Implemented order of intervention of the safety net tools 201

Graph A6.2. Schematic representation of the scenarios 202