A key question yet to be answered here is how long countries will be given to meet any new guidelines. If a deal pushes strict limits too quickly, “everybody will have a problem,” said Fernando Fernandez, an economist at IE Business School in Madrid. “You cannot expect any countries — not Spain, not Germany — to reduce their debt [by] 20 points of GDP in three years.”
Germany is working toward reducing its deficit to 0.35 percent of GDP by 2016, a process made easier by economic growth that has remained ahead of the rest of the euro zone. Still, even in mighty Germany, cuts will have to be made. The tightest standards being weighed here, if adopted, are so severe that analysts question whether the biggest basket cases, such as Greece, could hope to meet them even within a time frame of many years.
To meet a proposed cap on total national debt of 60 percent of GDP, for instance, Greece would need to halve its debt load. To reach such a goal without defaulting on its obligations to investors, Greece would be forced to impose drastic new austerity measures on a population that has already seen historic cuts in public wages, state payrolls and social benefits in recent months.
If fresh austerity does slow growth across Europe for years, economists warn it could make it increasingly difficult for deeply indebted countries such as Italy to dig themselves out of their financial holes anyway, raising the specter of another debt crisis down the line.
“Already, the Mediterranean economies are contracting rapidly, and Germany and other more-prosperous states are at near-zero growth,” Peter Morici, a business professor at the University of Maryland, wrote in an analysis of the harshest terms being advocated by Berlin and Paris.
“Rising unemployment will feed on itself, national tax bases will shrink, and sovereign debt will become less manageable,” he said. “Private investors, though perhaps initially comforted after Merkel’s reforms are adopted, again will become skeptical that Italy and the others will pay their debts and flee government bonds.”
Birnbaum reported from Berlin.