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Debt Sustainability Analysis in Reformed EU Fiscal Rules: The Effect of Fiscal Consolidation on Growth and Public Debt Ratios

Debt Sustainability Analysis (DSA) relies on macroeconomic and fiscal policy assumptions; it plays an essential role in providing an anchor for bilateral negotiations and surveillance in the context of reformed EU fiscal rules. While the European Commission assumes a constant short-run fiscal multiplier of 0.75, the literature highlights that there is no single fiscal multiplier for all countries and all times. Furthermore, the European Commission’s DSA framework assumes a fast dissipation of the output effect of fiscal adjustment, and that fiscal consolidation efforts by trading partners do not spill over into domestic economic activity. [..]