Securing fiscal sustainability and boosting potential growth after the crisis

The economy contracted sharply during the crisis but began to recover slowly from mid-2009. Unemployment rose by less than might have been expected, partly as the labour market was more overheated prior to the crisis than realised at the time. Strict employment protection legislation and the government’s continued focus on active labour market policies also played a role. In this context, the most pressing challenge for the near future is to prevent the cyclical increase in unemployment from becoming structural. As in other OECD countries, the upturn is still supported by exceptional fiscal and monetary stimulus. The fiscal policy response was generally well designed, but as a result the deficit widened significantly and fiscal sustainability deteriorated. As economic growth strengthens, the government coming in after the June 2010 elections will be confronted with the task of consolidating public finances without putting the recovery at risk. The most crucial longer-term challenges are to secure fiscal sustainability and raise potential growth.

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