Sunday, 20 November 2011

EU: Can expansionary budgets save us from hardship?

Should Europe spend its way out of gloom and ever slowing growth? Are there real alternatives to the so called austerity measures, actually efforts to reduce government borrowing and eventually total debt to sustainable levels?


EU government deficits

According to Eurostat, the 2010 total government deficit in the European Union was EUR 805,008 million, or 6.6 per cent of the gross national product (GDP), while 3% is the maximum prescribed by the stability and growth pact (SGP):

In 2010 the largest government deficits in percentage of GDP were recorded in Ireland (-31.3%), Greece (-10.6%), the United Kingdom (-10.3%), Portugal (-9.8%), Spain (-9.3%), Latvia (-8.3%), Poland (-7.8%), Slovakia (-7.7%), France (-7.1%), Lithuania (-7.0%) and Romania (-6.9%). The lowest deficits were recorded in Luxembourg (-1.1%), Finland (-2.5%) and Denmark (-2.6%). Estonia and Sweden (both 0.2%) registered a slight government surplus in 2010. In all, 21 Member States recorded an improvement in their government balance relative to GDP in 2010 compared with 2009, five a worsening and one remained unchanged.


EU government debt levels

The debt level allowed under the SGP is 60 per cent of GDP. At EUR 9,806,372 million, or 80.2 per cent of GDP, the EU was way above the level allowed by the SGP:

At the end of 2010, the lowest ratios of government debt to GDP were recorded in Estonia (6.7%), Bulgaria (16.3%), Luxembourg (19.1%), Romania (31.0%), the Czech Republic (37.6%), Lithuania (38.0%), Slovenia (38.8%) and Sweden (39.7%). Fourteen Member States had government debt ratios higher than 60% of GDP in 2010: Greece (144.9%), Italy (118.4%), Belgium (96.2%), Ireland (94.9%), Portugal (93.3%), Germany (83.2%), France (82.3%), Hungary (81.3%), the United Kingdom (79.9%), Austria (71.8%), Malta (69.0%), the Netherlands (62.9%), Cyprus (61.5%) and Spain (61.0%).


Budget hawks?

Let us pick two countries perceived as budget hawks by many:

With a government deficit of 10.3% the United Kingdom was firmly ensconced between the bailout cases. The UK debt level was 79.9% of GDP in 2010.

Germany, the reference country for eurozone sovereign debt, ran a public deficit of 4.3% of GDP and its debt level had climbed to 83.2%.


Avoiding hardship?

Keynesian stimulus would be welcome to avert hardship and recession, but the coffers are empty and the markets are shedding government bonds, driving up borrowing costs to ruinous levels. We are only one step away from a sovereign debt stampede.

The historic facts (2010) do not take ongoing and future consolidation efforts into account, but my sad conclusion is that the government hovercrafts are unsustainable in the present circumstances.

Austerity is less evil than disaster.



Ralf Grahn