Executive Summary  v

Abbreviations  vii

1. Europe's Greatest Financing Challenge  1

A. Rising Spending Pressures but Constrained Resources  1

B. Risk of Explosive Debt Trajectory  3

C. The Need for an Ambitious Policy Response  4

D. Scope of the Paper  5

2. A Sustainable Debt Path  7

A. The Importance of Anchoring Fiscal Policy  7

B. Estimating a Numerical Fiscal Anchor for the Region  10

C. A Reference Debt Path for the Average Country  11

D. Country Heterogeneity  14

3. The Critical Role of Structural Reforms  17

A. Growth-Enhancing Reforms  17

B. Fiscal-Structural Reforms  21

C. Putting It Altogether  25

D. Additional Reform Opportunities Not Included in the Simulations  27

4. Medium-Term Fiscal Consolidation  30

A. Size of the Adjustment Needs  30

B. Composition of the Adjustment  33

C. Cyclical and External Considerations  35

5. Rethinking the Role of Government  36

A. Beyond Reforms and Traditional Consolidation  36

B. Identifying and Understanding Very Large Fiscal Consolidations  38

C. Rethinking the Role of Government amid Rising Spending Pressures  44

6. Conclusion  50

A. Moving beyond "Muddling Through"  50

B. Toward a More Strategic Policy Response  50

C. Making the Strategy Politically Feasible  51