Athens Sometimes a number is worth a thousand words: 13 trillion euros – the national debt in the euro zone has recently risen to this gigantic level, mainly because of the pandemic. This corresponds to the level of economic output in the euro countries.
The result of the investigation is alarming. Only two of the five countries observed have a realistic prospect of reducing their debt at all in the next two decades.
These are Portugal and, surprisingly, Greece, Europe’s record debt champions. In the other three countries examined – France, Italy and Spain -, however, the debt ratios can be expected to continue to rise until 2041.
The study provides discussion material for the ongoing debate about the future interpretation of the EU Stability and Growth Pact. The rules stipulate a deficit limit of three percent of gross domestic product (GDP) and a national debt ratio of no more than 60 percent.
Currently, however, only one country in the EU complies with both criteria, wealthy Luxembourg. In southern Europe in particular, the mountains of debt have grown significantly in the pandemic.
Particularly worrying: France and Italy account for almost 45 percent of the debt with 2.8 and 2.7 trillion euros. France, which has held the EU Council Presidency since January, and Italy are particularly driving the debate on reforming the debt criteria of the EU Stability Pact.
The pact was suspended during the pandemic. The EU wants to decide this year whether the requirements will apply again from 2023 or whether they will be modified. The debate centers on the debt criterion. 15 of the 27 member states are currently no longer complying with the 60 percent target.
The Euro Stability Fund ESM has already spoken out in favor of raising the upper limit from 60 to 100 percent of GDP. At present, however, seven of the 27 EU countries already have debt ratios of over 100 percent, including France and the southern states of Greece, Italy, Portugal and Spain. The other two are Belgium and Cyprus.
Ifo boss Clemens Fuest sees the rising national debt as a “great risk”. Nonetheless, he thinks it “makes perfect sense to discuss reforms of the fiscal rules, but this debate must not be limited to a softening”. “We need a balance between more leeway and more financial discipline.
The President of the Ifo Institute advocates reforms of the fiscal regulation.
(Photo: imago images / photothek)
Above all, it is important to prevent individual countries from shifting the burden of their debts onto the community, for example by needing help in the next crisis because they go into it with high debts, ”said Fuest.
His suggestion: a change in the debt rule should be combined with a “capital adequacy requirement for banks that hold large amounts of government bonds in their own country”. That would lead to “more diversification of the bank portfolios and facilitate the restructuring of government bonds in the event of over-indebtedness”.
Few countries are heading towards debt reduction
The IW study shows that such cases of overindebtedness are definitely possible. The study predicts the possible development of national debt in France and four southern European countries over the next 20 years – this is the period within which, according to the Stability Pact, the EU states should reduce the part of national debt that exceeds 60 percent of GDP.
The study is based on three scenarios. The first extrapolates the fiscal data and growth figures forecast by the International Monetary Fund (IMF) for 2026 until 2041. The second scenario assumes that the countries will build on the pre-Corona years 2016 to 2019 in terms of economic growth and budget management.
In a worst-case scenario, the third assumption transfers the development of the years 2012 to 2019, which were marked by the euro debt crisis, to the years 2027 to 2041. The models take into account the demographic effects and the expected interest rate development.
The bottom line: According to the study, Portugal could lower its debt ratio from its current 131 percent of GDP to 74 percent by 2041 at best. According to the study, Greece, currently the most heavily indebted EU country with a rate of 207 percent, could reduce its debt to 139 percent of GDP by 2041.
Both countries benefit above all from strong economic growth and subordinate financial discipline, which leads to high primary budget surpluses. Moreover, because of the structure of its debt, Greece is in a relatively favorable starting position: over 75 percent of the debt lies with public creditors such as the ESM. The interest rates on the loans are low and the terms extend into 2070.
According to a study by the IW, Greece has a good chance of reducing its national debt.
(Photo: imago images / ANE Edition)
According to the study, the three other states have no prospects of reducing their debt ratios over the next two decades. In France, even in the best-case scenario, there is an increase from 116 to 123 percent in 2041, in Italy from 155 to 167 percent and in Spain from 120 to 134 percent. The main reasons are the weak primary balances and, especially in the case of Italy, the low growth momentum and the rapid aging of society.
The study shows that, even in the most optimistic case, none of the five countries will succeed in reducing national debt to 60 percent of GDP within 20 years. Under the most favorable conditions, Portugal would need at least 25 years for this, and Greece even 43 years. France, Italy and Spain would not even move closer to the target, but further away from it.
More: Germany’s debt level is only so low in the official statistics