Are Europe’s new debt rules impossible?
As part of Friday’s plan to save the euro, member states now have to wrestle their “structural deficits” (what their deficits would be without a boom or recession) to 0.5 percent of GDP. What’s more, the nations need to start hacking down their public debt drastically — each year, reducing debts by one-twentieth of the difference between their current debt-to-GDP ratio and the target of 60 percent. That all sounds complicated, but the bottom line, for many analysts, is that this is going to prove extremely difficult to pull off.
Check out the chart below from James Nixon of Societe Generale (via the FT). The first column shows total debt as a percentage of GDP for each country. The second column is how much they’ll have to reduce their public debt next year under the 1/20 rule. And the third column shows existing structural deficits — the thing that needs to get whittled down to 0.5 percent of GDP.
The euro area as a whole needs to pare back its structural deficit from 2.6 percent of GDP down to 0.5 percent. But it also needs to start down cranking its debt by 1.4 percent of GDP, and continue ratcheting down public debt for the next 20 years. Economists are already fretting that this relentless austerity will make it very difficult for Europe to start growing again anytime soon, especially given the relative timidity of Europe’s central bank.
For countries like Italy, Ireland, and Portugal, the adjustment will prove even more crushing. Granted, these countries could all juggle their debt load more easily with healthy economic growth. But, as Megan McArdle notes, healthy growth is hardly assured here. Many European countries are rapidly aging. The European Commission estimates that, by 2020, only about half of the population of southern Italy will be working age, between 15 and 64, and it’s not clear the region’s education levels are high enough to offset that demographic decline.
As Sarah Kliff noted last week, only three of the 17 euro nations managed to meet their previous deficit targets (only Estonia, Finland, and Luxembourg managed to stay under the limit every year since 2000). It’s hard to expect that these new mandates will somehow prove more feasible. As Paul Murphy at FT’s Alphaville comments, “What was supposedly agreed in Europe on Friday just ain’t gonna happen.”