Signalling Fiscal Stress in the Euro Area -- A Country-Specific Early Warning System

The sovereign debt crisis in the euro area has increased the interest in early warning indicators, with the aim to indicate the build up of fiscal stress early on and to facilitate crisis prevention by a timely counteraction of fiscal and macroeconomic policies. This paper presents possible improvements to enhance existing early warning indicators for fiscal stress, especially for the euro area. We show that a country specific approach could strongly increase the signalling power of early warning systems. Finally we draw policy conclusions for the setting up and application of a system of early warning indicators for fiscal stress