The Herculean Task To Stabilize Debt/GDP Ratios
Marc Chandler | Mar 28, 2014 05:28AM ET
This Niall O'Connor , that Pictet's Wealth Management group created. It shows the level of the primary surplus the euro zone countries need to stabilize their public debt (red bar), and the estimated position in 2014 (gray bar).
Of the eleven countries included here, seven have primary budget surpluses. Unappreciated by many, Italy has the largest primary surplus, around 2.5% of GDP, and it is still too small to stabilize its public debt ratio. This stands in stark contrast with Spain, which will be experiencing more than a 3% primary budget deficit. Yet, its bonds continue to draw nonresident interest and have actually outperformed Italy's.
Germany is the only country that is expected to be reducing its debt this year. It is projected to record the second highest primary budget surplus. On one hand, it might make sense for Germany to bring its debt levels back within the Stability and Growth Pact mandate of 60%. On the other hand, the synchronized tightening of fiscal policy (part of the Berlin Consensus?), will plague the euro area with socially intolerable levels of unemployment. It risks increasing the antipathy toward Europe, and a small taste of this may be seen in the May European Parliamentary elections.
In this sense it may be penny wise but pound foolish for Germany to be reducing its debt now. The penny saved in debt servicing now , and especially so in the very low interest rate environment, may arguably cost Germany more than 10-fold in the future, if as a consequence of its ill-timed austerity, it prevents stronger growth and weakens the commitment to the European project, of which EMU is a culmination of a more than 60-year effort.
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