This is the second report on Public finances in EMU prepared by the Directorate General for Economic and Financial Affairs. It is part of ongoing efforts by the Commission to upgrade analysis on fiscal policies in EMU. In addition, the report aims at contributing to the public debate on the budgetary policies, which needs to be broadened from its current focus on stability to include the contribution which public finances can make to growth and employment. 

• Part I  reviews the budgetary outlook and prospects for the euro area and its implications for the policy mix. It also gives an aggregate overview of the medium-term budget positions implied by the programmes.
  
• Part II examines how the framework for budgetary surveillance at EU level is evolving. It also assesses the interactions of EU surveillance with national budgetary procedures and institutions.
  
• Part III examines the cyclical stabilisation role of domestic budgetary policy in EMU and the impact of automatic stabilisers. This analysis could serve as a basis for developing guidelines on the appropriate policy response in EMU to various types of economic shocks and for a common analytical framework which could help avoid past co-ordination failures. 
  
• Part IV analyses progress in reforming tax and benefit systems to make them more employment friendly. It also considers the budgetary implications of ageing populations and how the long-term sustainability of public finance could be factored into the stability and convergence programmes. 
  
• Part V gives an overall picture of Member States’ budgetary situations, as it regroups for each country a description of budgetary developments and prospects, the opinions on the programmes and the country-specific budgetary recommendations of the BEPGs.