Euro zone's debt stabilizes as north-south split emerges

BRUSSELS Wed Jan 23, 2013 12:03pm EST

1 of 4. Men look at newspapers at a kiosk in downtown Lisbon January 23, 2013.

Credit: Reuters/Rafael Marchante

BRUSSELS (Reuters) - Public debt levels in the euro zone neared their projected peak last year after more than a decade of huge borrowing, but data also highlighted a divide between the richer north and Mediterranean countries where the burden is still growing.

Government debt stabilized at 90 percent of economic output in the 17 nations sharing the euro in the third quarter, barely changed from 89.9 percent in the second, the EU's statistics office Eurostat said on Wednesday.

With public debt expected to peak at 94.5 percent in all of 2013, according to European Commission forecasts, the stabilization is another sign the euro zone has a chance to emerge from a banking and debt crisis that nearly destroyed it.

But while the Commission expects debt to start falling from 2014, it is still above the 90 percent level that economists consider damaging for growth.

It is also well above the EU's limits for a healthy economy and will take decades to pay down.

Europe's debts soared from the EU-mandated limits of 60 percent of gross domestic product following the introduction of the euro in 1999, as countries from Spain to Ireland indulged in massive borrowing at very low rates of interest.

A divide now exists between France and Germany on the one hand, where debt fell slightly in the third quarter from the second, and the economies of Ireland, Greece, Portugal, Spain and Italy, whose debt-to-GDP ratio rose in the July-September period.

Debt in Ireland, where a burst real estate bubble forced the country into an international bailout, reached 117 percent of economic output in the quarter, while the number was 127 percent in Italy. Spain saw its burden tick up to 77 percent of GDP, and the Commission sees it reaching 97 percent in 2014.

Greece's debt rose to 153 percent of GDP in the quarter and will reach 189 percent in 2014, although a deal struck by euro zone finance ministers and the International Monetary Fund in November aims to take it down to 124 percent by 2020.

Rising debt is particularly worrying for Italy and Spain, the euro zone's third- and fourth-largest economies, which are in recession and need growth to cut debt and unemployment.

Italy's Economy Minister Vittorio Grilli admitted as much in Brussels this week, saying the country's economic recovery from 2014 would be "inadequate".

Compared to the United States and Japan, the euro zone looks better off, with economists seeing U.S. debt at 115 percent of GDP by 2016 and the Japanese burden climbing to an eye-watering 250 percent by then.

But the European Commission, which has powers to police countries' debts and wants to avoid the borrowing binges of the past, says that is no excuse, and its top economic official warned earlier this month of the costs to growth.

"When public debt levels rise above 90 percent they tend to have a negative impact on economic dynamism, which translates into low growth for many years," EU Economic and Monetary Affairs Commissioner Olli Rehn told diplomats in a speech. "That's why consistent fiscal consolidation remains necessary."

(Reporting by Robin Emmott; Editing by Hugh Lawson)

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Comments (1)
dareconomics wrote:
When it comes to the Eurocrisis, final victory is always within the sights of the eurocrats, and the mainstream media has no problem repeating these forecasts.

The latest news spun in this manner is the release of debt to GDP numbers from Eurostat. If you do not understand how these numbers work, then you could make a case for them constituting good news for the eurozone’s debt to GDP ratio rose only 0.1 points from 89.9% to 90%.

These numbers are reported on a lag. We already know that GDP shrinkage has accelerated since the 3rd quarter, so the decay of Eurozone public finances continues. Moreover, Spain is reporting fictitious numbers. If the Spanish debt to GDP figures were accurate, there would have been a larger reported rise in the Eurozone ratio, large enough so that “stabilization” could not be claimed.

Spain’s deficit was about 9% in 2012 according to economists, but the Spanish continue to report lower numbers. A 9% deficit equates to 2.25% per quarter, but the Eurostat report shows the Spanish deficit only rising 1.4%, which is in line with Spain’s forecast budget deficit from March. None of the other countries have a discrepancy like this. I checked the figures from Greece, Italy, Portugal and Ireland; their deficits rose in in line with their forecasts for the year.

Spain’s numerical subterfuge is hiding in plain sight. If one takes the trouble to examine the numbers released by the various departments and agencies, one learns that they conflict. Yet, when Spain requests a bailout and the true extent of the fraud is discovered, people will act surprised.

Spain is part of a larger problem in the Eurozone. The single currency has split the zone into two groups. In the core, using the currency is an advantage and economic and fiscal numbers reflect this. Note the higher growth rates in the FANG and their smaller, slower growing deficits.

In the periphery, using the currency has become a burden reflected in shrinking GDPs and growing budget deficits. These numbers show that the divide has widened despite all of the crisis fighting efforts deployed so far. Furthermore, there is no sign that this dynamic is improving.

Even though this article spins the Eurostat numbers as being positive, they are anything but. According to the European Commission, debt to GDP ratios are set to peak this year with decreases starting in 2014. There is no basis for making such a rosy forecast. GDPs continue to fall, and debts continue to increase with no end in sight. Only a miraculous boom starting late in 2013 will prevent the numbers from getting even worse.

dareconomics.com

Jan 23, 2013 11:13am EST  --  Report as abuse
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