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EU Public debt vulnerabilities remain despite a favourable macroeconomic outlook

The EU and EA public debt ratios are set to gradually decline over the next decade, under the baseline no-fiscal policy change scenario (5), from a peak of 88% of GDP in 2014 (respectively 94% of GDP in the EA) to 73½% of GDP in 2028 (respectively 78% of GDP in the EA). These levels are significantly lower than the ones projected a year ago (see DSM 2016 (6)), in line with a more favourable fiscal and economic outlook (7). Furthermore, when taking into account a large range of possible temporary shocks to macro-financial and fiscal variables (through stochastic projections), the EA public debt ratio is found to have a high probability to decline in the next 5 years (probability close to 95%). Nonetheless, several elements point to persistent fiscal sustainability risks. First, despite the overall downward trend projected in the baseline nofiscal policy change scenario, EU and EA overall debt ratios are projected to remain in 10 years' time above their pre-crisis levels, and well above the 60% of GDP Treaty reference threshold. Furthermore, as usual in debt projection exercises, fiscal assumptions critically drive the results: for instance, assuming government primary balances more in line with historical trends (based on last 15 years' averages) would bring a smaller reduction of public debt ratios (-5 pps. of GDP in the EU against -10 pps. of GDP in the baseline no-fiscal policy change scenario) (8). Finally, as highlighted in this report, EU and EA averages mask important crosscountry differences, with less favourable prospects in a number of countries. For instance, in some highly indebted countries, public debt burdens are projected, at unchanged policies, to decline at a slower pace, or even increase by 2028.[...]