Abstract
The COVID-19 pandemic has caused dramatic loss of human life and major damage to the European economy, but thanks to an exceptionally strong policy response, potentially devastating outcomes have been avoided.
Strong growth this year looks set to continue into the medium term. The authorities are seeking to accelerate growth and development, mainly through new infrastructure projects, but also with fiscal incentives. Although this growth strategy can bring substantial gains, it also poses sizeable risks, notably to public finances, and also in terms of the allocation of capital and financial stability. Gross debt has increased substantially over the past year and looks likely to increase significantly, to 80 percent of GDP. Staff recommends immediate and durable fiscal consolidation measures to limit risks to the public finances and to ensure favorable conditions for funding, particularly to the extent that further infrastructure projects would require additional public debt. Fiscal consolidation is also important for improving external balance, especially as the economy lacks independent monetary policy. A credible strategy to safeguard the health of the public finances would address longstanding problems with public expenditures, such as the very high level of spending on pensions and public sector wages. Measures should be supported by strengthening the fiscal framework and public financial management.