Eurostat: Eurozone debt actually decreasing

…last year. Between June and September 2011, the debt of eurozone governments as a percentage of GDP fell from 87.7% to 87.4%. The recovery’s combination of GDP growth, rising revenue, and falling unemployment meant debt was falling at an annualized rate of a full 1.2% points.

The kicker? The country in which it decreased the most was Italy, where it fell by an incredible 1.6 percentage points in a single quarter. Spain’s debt-to-GDP remained unchanged and recently-downgraded France’s debt-to-GDP fell by 0.8% percentage points. Virtuous Germany, on the other hand, was barely in the black at 0.2%.

That is to say – before the European Central Bank, under intense pressure by German officials both in and outside the bank, refused to shelter Italian and Spanish bonds from the Greek contagion, causing the double-dip recession – all the big eurozone countries had neutral or improving debt outlooks. If Berlin had had less influence over Frankfurt, there would actually be far less debt in the peripherals for German taxpayers to worry about.

Berlin looks to be unfazed. As far they are concerned this recession and debt crisis were caused by fiscal profligacy – certainly not bone-headed monetary policy. German officials apparently “simply don’t understand” what the rest-of-the-world (especially the U.K., U.S. and I.M.F.) is disinterestedly advising them to do.

But no. Despite being the most fiscally responsible member of the eurozone, Italy must make further cuts because of the mistakes of Frankfurt-Berlin. Actually, it is not necessarily a “mistake,” at all. Wonks in Brussels regularly describe what is happening, dispassionately, as an intentional strategy: The ECB refuses to do what it takes to drive Italian bond yields down in order to force the country to adopt the reforms the bankers, all-knowing as the Frankfurt office-dwellers are, think best (budget cuts, job market liberalization, privatization of public services, etc).

Note that this amazing quarter of fiscal performance on Italy’s part was immediately before Jean-Claude Trichet and Mario Draghi issued their September letter to Italy demanding these reforms (The Economist readily described it as “diktat). And that’s how, in the euro system, those who cause crisis in fiscally responsible countries still get to dictate what policies and governments those countries must have.

The most striking thing highlighted by the Eurostat figures is the perversely moralistic and anti-economic aspect of the European debate on austerity. German journalist Alan Posener, in a fine essay in Die Welt, attacks what he imagines to be Angela Merkel’s Protestant pain-now/payoff later attitude and suggests that having more debt for future generations is acceptable if it means growth now:

Compared to that [Germany recently fully repaying WW1 reparations debts], future generations should be glad to pay debt accumulated by a government that shelled out for unemployment benefits, pensions to mothers, health costs for the poor or college educations – even if it was a little dilatory about tax collection.

But in fact, the figures suggest there is not even any such trade-off: Had growth been maintained through an intelligent monetary policy then we would actually have less debt. The argument is not over whether we should pass on more debt to future generations to have growth today. It is about a status quo in the euro system, defended above all by Germany, which means Europe being both poorer and more indebted.

Other than that quibble, Posener’s essay is right on the ball. He concludes: “But the key is not savings. It’s growth. The green-Protestant, post-democratic austerity regime could end up destroying Europe.” With one-in-two youth unemployed in some countries and years more of recession still in sight, who could disagree?

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2 Responses to Eurostat: Eurozone debt actually decreasing

  1. Pietro Curatolo says:

    i must say your analysis is misleading. you can’t just look at what’s happening over a three-month period and deduce a whole theory from that, just look at the wider picture for example of italy’s public debt over the years (http://www.indexmundi.com/g/g.aspx?c=it&v=143 it doesn’t show 2011 but by that year we’ve reached 120%) and you see that it’s going up even before the crisis (rare exceptions when prodi was in government) and even before austerity measures. so would you say that things were fine as they were going or that there was a problem with our debt? how do you explain our declining spread with the german bunds which had reached skyrocketing levels in the final days of berlusconi’s era?

  2. Hi Pietro,

    The declining spreads in both Italy and Spain are almost certainly attributable for the most part to the ECB’s decision, shortly after Monti took office, to give virtually limitless funds to European banks (“stealth quantitative easing”, the Germans are against real QE for ideological/political reasons). Last December it gave half-a-trillion-euros to banks in 3-year loans (so-called LTRO: http://online.wsj.com/article/SB10001424052970203711104577198522062526202.html?mod=googlenews_wsj). That has significantly reduced the risk of recession due to banks not lending to each other and some banks have apparently started using the funds to buy Italian and Spanish bonds. Once the vicious circle is broken, it becomes much easier to get lower interest loans regardless of government.

    As to the long-term situation, Italy has not been as virtuous as Belgium (which massively decreased its debt), but was no worse than France or Germany (see general debt here, notably a sharp decline from 120% in the 1990s, stable situation in 2000s, when Paris-Berlin broke the S&G Pact: http://www.google.com/publicdata/explore?ds=ds22a34krhq5p_&ctype=l&strail=false&bcs=d&nselm=h&met_y=gd_pc_gdp&scale_y=lin&ind_y=false&rdim=country_group&idim=country_group:eu:non-eu&idim=country:it:fr:es:de:be&ifdim=country_group&tstart=792457200000&tend=1265842800000 ).

    And deficits: http://www.google.com/publicdata/explore?ds=ds22a34krhq5p_#!ctype=l&strail=false&bcs=d&nselm=h&met_y=edp_b9_pc_gdp&scale_y=lin&ind_y=false&rdim=country_group&idim=country_group:eu:non-eu&idim=country:it:de:fr:be&ifdim=country_group&hl=en&dl=en Note that the Italian deficit was only 1.6% immediately before the crisis and that Italy has a 3% primary surplus today (before paying interest on debt). What these and the Eurostat figures suggest is that in normal circumstances – recovery and low interest rates (as the US/Japan have thanks to an intelligent central bank) – Italy’s debt would be decreasing today. This was made impossible by the eurozone’s double-dip recession – the responsibility for which IMHO was that of the ECB (and those pressuring it), not Rome.

    The point for me is the precedent: A democratically-elected Prime Minister of a relatively fiscally responsible government (whatever one thinks of him personally) was removed from office through some combination of action by Angela Merkel and Mario Draghi, resulting in a new government with new policies pleasing those two. In the future, Frankfurt and Berlin may push for the elimination of a government or of policies *that you (and perhaps public opinion) like*, but you will be powerless to do anything about it. If “more Europe” mean more of that kind of government, then it is democratically indefensible.

    Look forward to reading your thoughts as you know the Italian political situation better than me. Almost as long as the blog, but there you go ;-)

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