- The eurozone budget deficit narrowed by 0.5 points to 3.7% of GDP in 2012, a more solid improvement than it might seem.
- The small countries at the eurozone’s core let automatic stabilisers come into play, while the peripheral countries relentlessly kept up their efforts.
- The “3% in 2013” is no longer a target ; the timetables for reducing deficits are being extended pretty much across the board.
- The budget cost of financial sector support measures is not very high at the eurozone level, but the impact is very poorly distributed and more aid is likely to be needed in the future.
Eurostat recently published its first official estimates of public finance statistics for 2012, which the European Commission will use in the weeks ahead to evaluate the progress each country has made over the past year to correct their excessive deficits. At this stage, it has only released the figures for public debt and “nominal” budget balances (not adjusted for cyclical fluctuations). Consequently, they cannot be used to break down the size of structural improvements made by each member state and the impact of growth - or more often recession - on public finances. Eurostat did release detailed figures that can be used to isolate the budget cost of financial sector support measures in each member state. In this focus, we will try to draw some preliminary conclusions from this data, which can be summarised in seven points.
1. The improvement was stronger than it seems
At first sight, the data seem to show a net slowdown in the pace of budget consolidation in the eurozone. The budget deficit for the eurozone as a whole was 3.7% in 2012, a reduction of “only” 0.5 points of GDP, whereas in 2011, the effort was four times higher at 2 points of GDP. Yet this improvement is not as disappointing as it might seem. Without the temporary impact of financial sector support measures in several member states (notably Spain and Greece), the eurozone deficit would have been 3.1% of GDP last year, and deficit reduction would have been 1 point of GDP in 2012, compared to 1.4 points in 2011.
2. The small countries at the eurozone’s core let automatic stabilisers come into play
Looking at the country by country breakdown, budget situations were still extremely diverse at the end of 2012. Budget balances deteriorated in several countries in 2012. These include the small countries of northern Europe, which had sufficiently solid budget positions before the crisis to maintain some manoeuvring room thereafter. Therefore they had no reason to undertake major fiscal consolidation measures in 2012. Most opted to let their accounts deteriorate with the economic environment. The European Commission’s latest forecasts (Winter 2013) even suggest that in addition to letting automatic stabilisers come into play, some also launched active policies to stimulate demand. As a result, Estonia swung back into a budget deficit of -0.3% of GDP, while budget deficits deteriorated sharply in Finland (by 1.1 percentage points to -
1.9%) and Luxembourg (by 0.6 pp to -0.8%). Yet these economies are much too small to talk about stimulating internal demand at the
eurozone level. In Germany, the budget balance improved by 1 point of GDP and the country swung into a surplus of 0.2% of GDP for the first time since 2007. In Austria, the budget deficit levelled off at - 2.5% of GDP. This spring, the European Commission is expected to recommend ending the country’s excessive deficit procedure, like it did for Germany last year.
3. Countries under adjustment programmes have relentlessly kept up efforts
In contrast, the deterioration of budget deficits in Belgium, Greece and Spain can be attributed to temporary factors – in this case measures to support the financial sector 1 . Excluding the impact of financial sector support measures, we can clearly see that the countries undergoing European adjustment programmes reported the biggest improvements in their budget positions. This is remarkable considering that all these countries, with the exception of Ireland, experienced severe recessions last year. Excluding the recapitalisation of banks, budget deficits in 2012 would have improved by 3.8 points of GDP in Greece, 2 points in Spain and 1.2 points in Ireland compared to the previous year. In Portugal, the situation is somewhat more complicated, but the message is similar. The deficit deteriorated sharply in 2012, by 2 points of GDP, but this too is due to temporary factors and does not reflect the implicit turnaround in public finances, which according to our estimates, could have reached 1.5 points of GDP last year 2 .
4. Excessive deficit procedure: Italy’s exit called into question
All in all, only five member countries (Germany, Austria, Luxembourg, Finland and Estonia) reported budget deficits that were clearly below 3% of GDP at the end of 2012. Italy’s budget deficit came to 3% of GDP last year. Apparently, given the risk that the budget deficit could swell significantly above this figure in 2013, the European Commission is hesitating to lift Italy’s excessive deficit procedure 3 (see “Budgetary stories” in The Week in the Eurozone, 12 April 2013, and the box this page). The country’s current political situation obviously adds to the uncertainty, and in any case, the Commission is unlikely to release its recommendations before the end of May.
5. Deficit reduction target: 3% by 2013 is too soon!
Of the eleven other eurozone members countries, very few are likely to reduce their public deficits below 3% of GDP in 2013. Postponing targets was initially presented as an exceptional move, but has now become fairly common, even though each country negotiates with the European Commission on a case by case basis. The principle is obviously accepted for countries in the midst of European adjustment programmes, but
other countries have also requested more time. Ireland already has until 2015 to turnaround its public finance situation, and Greece until 2016. Spain has also been granted a similar horizon and Cyprus will apparently benefit from the same treatment as In Italy, one of the Monti administration’s last decisions was to authorise back payments for about €40bn in arrears (2.5% of GDP, spread out over the next two years) owed by the public sector to private companies. This should give companies a real boost, limiting their financial constraints, lifting margins and eventually spurring investment. Eurostat published statistics on “commercial credit lines and advances”, which are not counted as debt according to the
Maastricht definition as long as they have not been paid 4 . These figures are only partially harmonized, and to date, Eurostat has been
unable to attain them from some countries (Germany, Austria). Even so, we can make some interesting observations about their evolution over time. First, arrears tended to accumulate in the first years of the crisis in most eurozone member countries, notably in Italy, where they seem to be highest by a long shot, assuming the figures are sufficiently comparable. Mario Monti’s programmed payback of arrears should bring them close to the level observed in Greece, which has clearly been making similar efforts. The size of arrears has also declined regularly in Spain, Ireland and France in recent years. Even so, arrears are still high in Ireland and France, as well as in Portugal and Slovenia. At a time when governments are
seeking ways to stimulate growth, this seems to be a good solution.well. The Troika just recommended pushing back the deadline for Portugal by a year (at this point to 2015). Of the other member states undergoing excessive deficit procedures, only Belgium seems to be in a position to reach this target, after reporting a deficit of only 3.4% of GDP in 2012, excluding the impact of the Dexia bailout. In contrast, France and the Netherlands have already announced that they will officially request more time (2014), and Slovenia and Slovakia are likely to follow suit.
6. No reduction in debt ratios without growth
At the end of 2012, public debt ratios ranged from 10.1% of GDP in Estonia to 159.6% in Greece. Germany has the median debt ratio at 81.9%, i.e. half of the other member countries have lower ratios, and the other half, higher ratios (chart 4). Yet the biggest member states are also among the most heavily indebted, so the eurozone average is 90.6% of GDP, nearly 10 points higher than the median. The average is also nearly 2 points higher than in 2011. None of the member states managed to reduce their public debt ratios last year 5 . Germany and Luxembourg had done so in 2011. Generally speaking, the core countries are clearly in a better position to get a hold on debt in 2013, not only because of sharply reduced deficits, but
because their growth prospects are not as bad as for their trading partners. Sluggish growth is the reason why debt reduction targets
have had to be pushed back for the eurozone as a whole: even with a deficit of around 3% of GDP in 2013, growth would have to accelerate by about 1.7% to reduce the debt ratio according to our estimates. Although the deficit target could be reached (close to 3% of GDP this year), an upturn in growth is out of the question.
7. Impact of financial sector support measures: very poorly distributed
At the eurozone level as a whole, financial sector support measures had a relatively small impact on public debt: at the end of 2012, they accounted for a little more than a fifth of the total increase in the public debt ratio since 2007, or 5.5 points of GDP out of a total increase of 24.2 points 7 . Yet the weight of this support is very poorly distributed. Evaluated in billions of euros, most of the cost is integrated in German debt: the impact of bank support measures on Germany’s public debt is estimated at €286bn at the end of 2012, out of a total of €523.5bn for the eurozone as a whole. Although much smaller, support measures nonetheless amounted to between €18bn and €54bn in Portugal, Belgium, Greece, the Netherlands, Ireland and Spain (chart 5). Together, these seven countries account for 96.5% of the impact of financial sector support measures in the eurozone. The ranking changes dramatically, of course, when expressed as a share of the GDP of each country, but the list of the main countries concerned is still the same. Financial sector support measures accounted for roughly 10 points of GDP in Portugal and Germany, nearly 20 points of GDP in Greece and nearly 30 points in Ireland. In contrast, they are nil or virtually nil in several member states, including France and Italy.
The panorama presented in this focus must be interpreted carefully, notably because the wave of banking sector recapitalisations is not necessarily over yet, and government intervention could prove necessary again in some countries. We already know with certainty that these commitments will be modified substantially in the months ahead for Greece (the EFSF must still pay out more than €7bn earmarked for the financial sector as part of the second bailout plan), Cyprus and Slovenia. Even so, we still stand behind our observation that the costs of financial sector support measures were very unequal within the eurozone. Among the so-called core countries, Germany above all, but also the Netherlands and Belgium have already provided non-negligible support to their financial sectors, higher than the eurozone average of 5.5% of GDP. Keep this factor in mind when examining the prospects for moving ahead with banking union. It is also one of the reasons why there is such a fierce debate over the possibility of having the European Stability Mechanism directly recapitalise certain financial institutions in the future.
BY Frédérique CERISIER
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