Control the huge debt of Europe
The net cost of aid for the crisis offered by the G-20 in 2009 to the financial sector amounted to 1.7% of GDP (905,000 million dollars), according to the International Monetary Fund, while the discretionary fiscal stimulus reached 2% of GDP in 2009 and 2010. All eurozone countries, except Luxembourg and Finland, had fiscal deficits of over 3% of GDP in 2009, while those of Greece, Spain and Ireland exceeded 10%. In just one year, the overall debt of the eurozone governments increased by almost 10 percentage points (78.7% of GDP in 2009 compared to 69.3% in 2008).
Regarding Germany, the 2010 federal budget shows a high unprecedented deficit that exceeds 50,000 million euros. The debt of the private sector will exceed 1.7 billion euros, close to 80% of GDP. Interest payments, which consume more than 10% of Germany’s federal budget, will grow at the same time as the debt burden – and even faster if interest rates rise.
However, the financial crisis and the subsequent recession are what for the moment explain these high levels of indebtedness. The truth is that many European countries and the G-20 have been living beyond their means-including Germany, despite its reputation as a paragon of fiscal rectitude.
Even in prosperous times, governments have been spending much more than they have received for a long time. And what can be worse, some spend more than they could feasibly reimburse considering the potential for long-term growth decline in their economies due to the aging of their populations. That waste has led to levels of debt that will be unsustainable if we do not take action on it.
For this reason, Germany decided in 2009 to enact strict fiscal rules in its Constitution. The Schuldenbremse or debt brake requires the federal government that the structural deficit does not exceed 0.35% of GDP for 2016, while in the German Länder any kind of structural deficit will be banned by 2020. Undoubtedly, the Current federal government will comply with these rules, which implies reducing the structural deficit to approximately 10,000 million euros for 2016 – a decrease of around 7,000 million euros annually.
This year, the social protection chapter in Germany accounts for more than half of its federal spending. So the only possible option is to cut social spending, at least moderately. However, this type of fiscal consolidation can only be achieved if the majority perceives it as socially equitable. Recipients of public and private assistance alike, as well as public officials, have to share the sacrifice. Therefore, the German companies will have to contribute to the fiscal consolidation by means of reductions in subsidies and additional taxes to the main companies of energy, air and financial institutions. Likewise, public officials must renounce promised wage increases, while the Government is trying to save up to three billion euros in spending on the federal armed forces by means of structural reforms.
The fiscal rules stipulated in Germany serve as an example for other countries of the eurozone. However, all governments in the eurozone must demonstrate their own commitment to fiscal consolidation in order to restore the confidence of the markets – and their citizens. Recent studies show that when a government’s debt burden has reached a threshold that is perceived as unsustainable, a larger debt will only impede economic growth instead of stimulating it.
The debt crisis in Greece was a clear warning that those responsible for the development of European policies should not allow public debt to accumulate indefinitely. The EU did well to take resolute measures to ensure the stability of the euro through short-term aid to Greece and the establishment of the European Financial Stabilization Mechanism (EFSF). However, although the EFSF is a necessary measure to restore confidence, the Greek crisis has revealed the structural defects of the fiscal policy framework of the European Monetary Union (EMU), which can not and should not be corrected with the money of other countries.
In effect, I consider that the EFSF is an interim measure while we correct the shortcomings of the stability and growth pact, whose fiscal rules lack force. Therefore, we need a more effective crisis prevention and resolution framework for the eurozone, which strengthens the preventive and corrective provisions of the pact. Sanctions for eurozone countries that seriously violate EMU rules must take effect much more quickly and with less political discretion and must be more severe.
Germany and France have proposed more severe credit and expenditure measures, backed by harsh semi-automatic sanctions against governments that do not comply. The EU funds should be frozen and the voting rights of countries that repeatedly ignore the recommendations to reduce their excessive deficits and those that manipulate official statistics should be suspended.
The monetary union was not designed to be a panacea for the members of the eurozone nor to serve as a millionaire model for financial speculators. Nor is its purpose to be a system of redistribution from rich to poorer countries through cheaper loans to governments in the form of common eurobonds or unrestricted fiscal transfers. The monetary union will not succeed if some countries repeatedly have deficits and weaken their competitiveness at the expense of the stability of the euro.
The UME was designed to incentivize structural reforms. It was assumed that the wasteful members would be forced by the stability and growth pact, as well as by their partners, to live according to their possibilities and thus strengthen their competitiveness. In contrast, Germany’s previous social democratic government weakened the pact when it politically agreed with it, while the less competitive eurozone countries allowed wages to rise and the public sector to grow, and then looked the other way while easy credit powered the economy. debt and asset bubbles.
We can not boost sustained growth or avoid the sovereign debt crisis in Europe (or anywhere else) by accumulating more debt. European countries need to reduce their deficits in a way compatible with growth, but they have to reduce them. It can be done: Germany is reducing its debt burden to sustainable levels while strengthening its long-term growth prospects. Their experience in reducing the deficit by fostering growth, together with their suggestions for strengthening the fiscal framework of Europe, could serve as a model for European economic governance.