LONDON--(Marketwire - February 8, 2011) - There are few positives for countries that have been worst hit by the Great Recession. Yet some -- such as Greece, Italy, Poland, and Hungary -- have greater room to manoeuvre than countries with fewer fiscal challenges, according to a report by The Boston Consulting Group, published today.
But exploiting this room to manoeuvre will require strong leadership and an ability to clearly communicate and actively engage citizens on the rationale for consolidation measures.
Larry Kamener, a coauthor of the report and the leader of BCG's public-sector practice globally, said, "For prime ministers and presidents, fiscal consolidation will be a test of their ability to lead. They will have a lot of negotiating and convincing to do -- because they frankly have no option but to implement once-in-a-generation changes."
The Essential Dimension: A Country's Room to Manoeuvre
In the report, BCG investigates the financial predicaments of 14 countries -- Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, the Netherlands, Poland, Portugal, Spain, Sweden, and the U.K. -- and analyses them according to two dimensions: the size of the challenge they face and their room to manoeuvre.
But it is clear that it is not only the countries with well-publicised problems that need to consider the impact of a "double dip" of pain.
"Countries that have previously implemented effective reforms -- or have already started to implement fiscal reforms -- have less room to manoeuvre," said Mr. Kamener. "They will find the next round of choices to be more difficult compared with countries that still have substantial reforms to make."
A country's room to manoeuvre was calculated by measuring five weighted variables: the ability to exploit the revenue base, to cut the expenditure base, to increase labour participation, to privatise government assets, and to expand monetary policy.
Accordingly, Germany, while facing a smaller challenge than France or Italy, has less room to manoeuvre if its economy starts to falter.
Dealing With The Rocky Road Ahead: A "Double Dip" of Pain
In the report, BCG warns that measures to cut a country's deficit will have to be radical, will take at least five years to implement, and will hurt at least twice: once when the plan is published and again when each reform takes effect and people start to feel the impact personally.
Explaining the task facing Europe's leaders, Mr. Kamener said, "To reach the goal of stabilising debt at 60 percent of GDP by 2030, European countries cannot afford to tinker with small changes. Merely cutting away fat in public administration will not suffice. Depending on the country, serious fiscal reform may require big changes in long-lived practices such as early access to retirement pensions, free health care and education for all, and large defence programmes. In many countries, there will continue to be resistance to changing the social contract."
Four Keys To Sustainable Fiscal Consolidation
BCG identifies four factors that raise the odds that a recovery plan will be successful and sustainable. These are:
- A strong government
- A clear and comprehensive medium-term plan
- Strong institutional capabilities
- A strong fiscal framework
"Political leaders and voters have choices about how government can reverse the course and pace of fiscal decline," said Pia Hardy, a coauthor of the report and a principal in BCG's Helsinki office. "And if they're going to commit to difficult choices, they should spend their efforts on choices that will achieve sustainable consolidation, so that they can weather not just today's crisis but also the inevitable next one."
She added, "The four factors we have identified have been instrumental for countries that have either worked their way out of a fiscal crisis in the past, such as Sweden in the 1990s, or that appear to be on the right track today, such as the U.K."
The report's authors, who examined past crises and interviewed senior civil servants across Europe, praised the U.K. for having so far conducted a good response to the fiscal crisis. "By quickly assembling a detailed yet well-narrated plan, the U.K. government was able to earn credibility early on. Its plan is off to a promising start in delivering a sustainable fiscal solution," said Craig Baker, the leader of BCG's public-sector practice in the UK.
But the U.K., like other governments, will have to remain vigilant when the reforms begin to bite. "Government will have to demonstrate -- time and time again -- how the fiscal changes are taking hold and what benefits they bring," said Mr. Baker. "They should closely monitor the impact of the changes so that they can respond quickly to unforeseen consequences before they spin out of control."
To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.
About The Boston Consulting Group
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