A significant deterioration in public finances lies ahead, both over our forecast horizon and beyond. Wider budget deficits and bank-rescue operations should cause debt to climb quickly. A large majority of countries will find themselves in excessive deficit procedure soon and for the region as a whole debt will reach a new historical high.

The underlying long-run fiscal outlook will prove to be key for the chances of stabilising of the debt level. Continental Europe is in for a well-documented demographic demise, which will likely weigh on trend growth and on budget balances. A considerable part of the negative repercussions on the labour force could be fended off by people working longer. The ECB projects the euro-area budget balance to worsen by 5.5% of GDP between 2010 and 2050, thus arriving at an estimate that is about a quarter above the previous official EU estimates of the projected increase in age-related public spending (see ECB Working Paper 994 – Fiscal Sustainability and Policy Implications for the Euro Area). According to the ECB projections, only Finland, Germany, Austria and Italy might get away with small or no policy adjustments . Such long-term projections need to be taken with a pinch of salt, given their sensitivity to small changes in the underlying assumptions. But they provide a rough idea of the long-term headwinds for fiscal policy. The consumers’ trust in the long-term sustainability of public finances, including public pensions, is vital for their saving reaction.