Euro-Area Debt Swells as Governments Strive to End Crisis

The euro area’s government debt mountain reached new heights in 2013, underscoring the challenges the bloc’s governments continue to face in reining in public spending.

Government debt of the 18 nations using the euro reached 90.9 percent of gross domestic product at the end of last year, up from 89 percent 12 months earlier, the European Union’s statistics office in Luxembourg said today.

“The upbeat narrative of just a short while ago -– of a budding recovery spurred by past reforms and an easing of fiscal austerity -- has given way to deep concerns as growth flags and market tensions rise,” Alessandro Leipold, a former International Monetary Fund official who is now chief economist at the Lisbon Council research group in Brussels, said in a note today.

It has been five years since Greece acknowledged that its debt was twice as high as it initially forecast, triggering a poisonous ripple effect across the currency bloc that left five countries needing bailouts. While euro-area governments have pushed through tougher fiscal rules to limit nations’ spending, policy makers say debt remains one of the region’s biggest threats.

While Greece has the highest debt-to-GDP ratio in the 18-nation single-currency bloc at 174.9 percent, Italy, the bloc’s third-largest economy with the third-highest debt, at 127.9 percent, remains a headache for policy makers.

Renzi’s Cabinet

Italian Prime Minister Matteo Renzi’s cabinet passed on Oct. 15 an expansionary budget plan of 36 billion euros ($46 billion) for next year aimed at revamping the country’s economy with tax cuts and additional spending, with economists questioning whether it is compliant with EU rules.

Portugal (at 128 percent), Ireland (123.3 percent), Belgium (104.5 percent) and Cyprus (102.2 percent) all have debt piles much higher than the EU’s 60 percent limit.

The bloc’s effort to reduce its debt burden is hindered by the combined hazards of slow growth and low inflation. The region’s economy stagnated in the second quarter and inflation, at 0.3 percent last month, isn’t seen returning to the European Central Bank’s target of just under 2 percent before 2017.

“Fiscal space is squeezed by high public debt,” ECB Executive Board member Benoit Coeure said in a speech in Riga on Oct. 17. In several euro-area countries, there is “a large debt overhang across all sectors due to the pre-crisis credit boom.”

Calculating Changes

Today’s data takes into account a change in the method for calculating GDP across the EU that came into effect last month. The EU’s statistics office has consequently adjusted its debt and deficit data for every year from 2010 from the estimate it published in April.

As a result of the calculation changes, Austria’s 2013 debt has been revised upward by 6.7 percentage points to 81.2 percent of GDP and Cyprus’s down by 9.5 percentage points to 102.2 percent. Croatia, which is in the EU but not the euro area, saw its debt ratio revised upward by 8.6 percentage points to 75.7 percent.

Ireland’s 2013 deficit has narrowed under the revision by 1.5 percentage points to 5.7 percent of GDP, Luxembourg’s has improved by 0.6 percentage points to 0.6 percent, Greece’s and Cyprus’s have both decreased by 0.5 percentage points to 12.2 percent and 4.9 percent respectively. Lithuania -- which enters the euro bloc on Jan. 1 -- has seen its deficit widen by 0.5 percentage points to 2.6 percent, while Belgium, Estonia, Croatia and Finland have had their deficits revised wider by 0.3 percentage points.

Deficit Revisions

The European Commission said today that none of the debt or deficit revisions change whether a country is within or in breach of its EU fiscal limits.

Today’s figures reveal that the bloc’s debt jumped from 7.9 trillion euros in 2010 to 9 trillion euros in 2013, increasing from 83.7 percent of GDP to 90.9 percent. The data also show that while euro-area nations are gradually succeeding in reducing their budget deficits, some remain far from the EU’s limit of 3 percent of GDP.

France, the bloc’s second-biggest economy, posted a deficit of 4.1 percent in 2013, while Slovenia (14.6 percent), Greece and Spain (6.8 percent) remain significantly above the EU’s target. Across the bloc, the deficit narrowed from 3.6 percent in 2012 to 2.9 percent in 2013.

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