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European Public Debt Swings Wildly



This is the third in a series of postings by Mr. Aslund about debt and fiscal issues in Europe. A previous essay, "EU Countries Know How to Slash Public Expenditures," was posted March 11. Natalia Aivazova has provided able research assistance.

A proposition widely shared among economists is that it is very difficult for western democracies to change their levels of public debt relative to GDP. But that view is not correct. Eurostat statistics on public debt as a share of GDP of 27 current EU members in the 1995–2011 time frame show remarkably big swings in individual countries, while the average level has varied little.

Overall, public debt has been high in these European countries. Its average level was 70 percent of GDP in 1996, well above the Maastricht debt ceiling of 60 percent of GDP that was agreed in December 1991. Then it was hit by two temporary lows of 60.5 percent of GDP in 2002 and 59 percent of GDP in 2007, after which it shot up with the global financial crisis to 82.5 percent of GDP in 2011. It stabilized at approximately that level in 2012, and now it is likely to moderate. In only one single year, the boom year of 2007, did the EU countries' average public debt fall below the Maastricht ceiling.

Yet, the sinners have been few, big, and they have sinned greatly. In 1995, 16 out of 27 countries complied with the Maastricht debt ceiling, while in 2007 18 countries did so. Three countries never complied—Belgium, Greece, and Italy—while all the others did some of the time.

Among individual EU countries, the variations in public debt ratios are striking. Seven countries reduced their public debt burden by more than 30 percent of GDP, which is a lot, while seven countries increased their public debt burden by a corresponding amount. Curiously, two countries—Ireland and Spain—belong to both groups. The realization of having gone astray once did not stop these two countries from doing so again, admittedly in another fashion (through bank and real estate crises).

In the period 1995–2008, seven EU countries succeeded in cutting their public debt by more than 30 percent of GDP in this period. They were Bulgaria (95 percent of GDP), Ireland (55 percent), Belgium (46 percent), Denmark (46 percent), Sweden (34 percent), Spain (31 percent), and Holland (31 percent) (figure 1).

Figure 1 EU public debt declines = 30 percent GDP

Bulgaria started out with huge public debt levels and hyperinflation in 1997. Belgium had the highest public debt in the whole of the European Union, at 130 percent of GDP in 1995, but it never got even close to the Maastricht standard. The other five countries embraced fiscal discipline and brought their public debt level below 40 percent of GDP, much less than the Maastricht ceiling.

In the years 1999–2011, seven EU countries increased their public debt by more than 30 percent of GDP. They were Ireland (81 percent of GDP), Greece (76 percent of GDP), Portugal (57 percent of GDP), the United Kingdom (47 percent of GDP), Malta (36 percent of GDP), Spain (33 percent of GDP), and France (30 percent of GDP) (figure 2). They offer four different stories. Greece made every mistake in the book. Ireland and Spain faced combined banking and real estate crises during the global financial crisis, and both transformed their bank recapitalization costs into public debt, which might have been a mistake. The United Kingdom and France pursued irresponsible public spending policies. Portugal and Malta unwisely accepted the high EU average of public expenditures as appropriate.

Figure 2 EU public debt increases = 30 percent GDP

Contrary to public perceptions, individual EU countries have shown an impressive ability to cut public debt as much as necessary. Yet, on average EU public debt remains far too high. The cause is the decisive powers within the European Union. The greatest sinners are not the current crisis countries, but the four big EU countries, and secondly the 15 old EU members. The large old EU members have posed the greatest problems. In 2011, the four biggest EU countries had the following public debt ratios: Italy (121 percent of GDP), France (86 percent of GDP), the United Kingdom (85 percent of GDP), and Germany (81 percent of GDP).

Their persistent fiscal irresponsibility shows the dangers of leaving decisions to the European Council, dominated by the dysfunctional and unrepresentative German-French duo. The best way of disciplining them would be to make their budget control subject to simple majority vote of the many small countries with good fiscal discipline, such as, the Nordics, the East Europeans, the Netherlands, Luxembourg, Austria, and Malta. This would be best accomplished through a reinforcement of the powers of the European Commission, which in turn should be made fully accountable to the European Parliament.

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