also have been easier, more politically acceptable, and (thus) strengthened market perceptions of “commitment”, encouraging investors. It is noteworthy that relative to 2007, Greece’s debt ratio when the sovereign crisis struck in 2010 had risen by 42% (the lowest increase among the GIPS). In contrast, Ireland’s by 2011 had risen 354% (though the level was much lower than Greece’s). Spain’s debt ratio in 2012 had increased by 136%, but the actual level (Table 6) was lower than Greece’s in 2007. These numbers indicate _that both the level and rate of increase in debt ratios matter in their impact on risk premia_ substantially – and countries are particularly vulnerable when global risk is high.

|**Table 5c:**<br>**balance a**|**Genera**<br>**s a shar**|**l gover**<br>**e ofpo**|**nment**<br>**tential**|**structu**<br>**GDP(**|**ral**<br>**%)**|<br>|**Table**<br>**balanc**|**5d: Gen**<br>**e as a s**|**eral go**<br>**hare o**|**vernm**<br>**fpoten**|**ent pri**<br>**tial GD**|**mary**<br>**P(%)**|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
||2010|2011|2012|2013|2014|2015|2010|2011|2012|2013|2014|2015|
|Greece|‐10.2|‐6.3|‐0.3|1.6|1.0|0.5|‐4.4|0.9|4.8|5.6|5.0|4.3|
|Ireland|‐8.9|‐7.5|‐6.2|‐4.0|‐2.7|‐2.2|‐5.9|‐4.1|‐2.1|0.2|1.3|1.0|
|Portugal|‐8.0|‐6.2|‐3.1|‐2.5|‐1.4|‐2.0|‐5.1|‐1.9|1.8|2.3|3.5|2.6|
|Spain|‐7.1|‐6.4|‐3.4|‐2|‐1.9|‐2.9|‐5.2|‐3.9|‐0.5|1.4|1.5|0.2|
|EA‐19*|‐4.2|‐3.6|‐2.1|‐1.4|‐1.0|‐1.0|‐1.5|‐0.6|0.9|1.4|1.6|1.4|
|EU‐28*|‐4.6|‐3.8|‐2.7|‐1.8|‐1.7|‐1.6|‐1.9|‐0.9|0.2|0.9|0.8|0.7|
|EA‐19**|‐3.9|‐3.6|‐2.3|‐1.3|‐1.5|‐1.4|‐1.5|‐0.4|0.0|0.5|0.8|0.7|
|EU‐28**|‐3.9|‐3.6|‐2.2|‐1.2|‐1.6|‐1.8|‐1.8|‐1.2|0.0|0.5|0.6|0.7|

*: weighted average. **: median. Adjustment based on potential GDP excessive deficit procedure. Estimates start after 2014. Source: European Commission, Annual macro‐economic database.

**Table 6: General government consolidated gross debt as a share of GDP (%)**

|Greece|2000<br>104|2001<br>107|2002<br>105|2003<br>101|2004<br>103|2005<br>107|2006<br>104|2007<br>103|2008<br>109|2009<br>127|2010<br>146|2011<br>172|2012<br>159|2013<br>177|2014<br>179|
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Ireland|36|33|31|30|28|26|24|24|42|62|87|109|120|120|108|
|Portugal|<br>50|53|56|59|62|67|69|68|72|84|96|111|126|129|130|
|Spain|58|54|51|48|45|42|39|36|39|53|60|70|85|94|<br>99|

Source: Eurostat.

_<u>Expansionary consolidation.</u>_ What was the underlying rationale for these adjustments? In the 2008‐09 crisis, policy debate centered on (a) whether fiscal consolidations could be expansionary when countries had high debt levels, market perceptions of default risk were very high, and risk premia had jumped, constraining borrowing and investment; or (b) whether fiscal consolidation would lead to such a sharp drop in output in the short term that debt sustainability could not be achieved by lowering deficits. Later, as the growth recovery stalled and regional growth slowed, the debate moved to the possibility of hysteresis or the impact of short term adjustment on potential output and eventually potential growth. The debate on whether fiscal consolidations are expansionary is relevant to the extent that countries have a choice about the size and phasing of consolidation packages; the role of official creditors is key to supporting a fiscal adjustment that is not so strong as to undermine short term growth to such an extent that it undermines medium‐term growth prospects as well. However, creditors may be short sighted, governments may lack commitment, and Keynesian effects may be underestimated‐ in these instances, governments are required to adopt more stringent consolidation packages than might be appropriate in terms of the effect on output and employment.

A number of empirical studies have examined the impact of fiscal consolidation episodes on private aggregate demand and thus growth in the short and long runs, and specifically on debt sustainability, as well. They have tried to identify conditions under which non‐Keynesian effects outweigh Keynesian ones, so that consolidations are expansionary. Non‐Keynesian effects are more likely to be in evidence when risk premia on government debt substantially reduce confidence in macroeconomic stability; risk premia fall in response to fiscal consolidation and reduce public borrowing requirements.

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