What’s driving European debt increases?

at 09:46 AM ET, 12/05/2011

Why are European nations faced with such high debt loads? The story tends to vary quite a bit for each country. Alex Harrowell over at Fistful of Euros points to a recent chart from the International Monetary Fund breaking down the sources of the increase in public debt for Germany, Italy, France, and the United Kingdom since the global slowdown began in 2007:

Notice that Germany spent, by far, the most in bailing out the banks — that’s the big yellow square — and also carried out the largest stimulus program (the red square) of any of the countries listed, reaching 5 percent of GDP. Note, too, that Germany’s public debt has ballooned far more since 2007 than Italy’s or France’s. Yet Germany has also had the strongest recovery from the recession, which is why its revenues, shown in blue, have increased over time. Growth matters, a lot.

Italy, by contrast, didn’t see its revenues plunge to unsustainably low levels after the financial crisis. What happened is that the country has seen its debt explode due to “interest growth dynamics” — namely, a sharp spike in borrowing costs. Why is that? Right now, Italy collects more in taxes than it spends, but the country is still carrying a high debt burden from its profligate days in the 1980s, under a bygone government. And, in recent times, lenders haven’t been convinced that Italy can either grow quickly enough or tap its considerable resources to pay off its debt, sending bond yields soaring (though the new government under Mario Monti is trying to stave off the bond vigilantes with a fresh deficit package).

The United Kingdom, meanwhile, is a notable tale. The country has seen the biggest explosion in debt of any of these countries since 2007, which, in turn, has triggered a drive for austerity by David Cameron’s government that might end up exacerbating the slowdown. At the same time, the U.K. isn’t on the euro, and has the ability to control its own currency, so markets haven’t been panicking about the country’s ability to repay its debts the way they have been about Italy.

 
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