Euro Area Scrutiny by Cinzia Alcidi and Daniel Gros
An in-depth analysis requested by the European Parliament’s ECON Committee.
The approach to debt sustainability analysis (DSA) followed by the IMF and European Commission (EC) are broadly similar. The commonality derives from the fact that debt levels, deficits and interest rates costs are linked by universal accounting relationships.
DSA is a standard instrument of fiscal surveillance but it is also a tool for taking decisions about the provision of financial support. In the latter context, differences between the IMF and EC exist. One technical difference comes from the sensitivity parameters, which govern the feedback loop linkages between interest rates and debt. Such parameters are unobservable and small but powerful in driving results. The most important difference however is that the IMF has a fix and shorter horizon for the analysis and for the support, than the ESM. The Greek experience showed that that ESM support can be so large and long term that it can have a decisive impact on the DSA itself. This is not the case for IMF. This dissimilarity reflects specific perspectives of the two institutions associated with the different constituencies they represent.
Overall, given the uncertainty surrounding future paths of debt and the large costs of sovereign defaults, IMF and EC DSAs should be regarded as complementary rather than alternative.
The full paper is available here.