• Austerity measures still not enough to stop increasing debt

    EU countries under market pressures must be prepared to swallow even stronger doses of austerity, the European Commission said on Monday (12 September).

    Most states have slashed tens of billions from their public spending plans already, but this may not be enough, according to an annual report from the EU executive on the state of public finances in the bloc, as debtloads continue to grow.

     

    “Member states facing market pressures must continue to deliver on reaching their fiscal targets and take additional measures if needed”, economy commissioner Olli Rehn said in a written statement upon the release of the report.

    Unusually, Rehn himself did not appear publicly to present the findings, cancelling a scheduled press conference due to a “serious family matter”, according to his spokesman, Amadeu Altafaj-Tardio.

    The head of the commission’s economy department, Marco Buti, wrote in a gloomy “editorial” at the front of the document that despite a return of GDP growth, the withdrawal of stimulus and budget-cutting exercises across the bloc, “debt is still expected to continue increasing for the next year or so in most cases. Once it has reached its peak, the issue is not over.

    “It will not be sufficient to stem the increase; rather, additional consolidation measures will be required to reduce it from its new level”, he continued, arguing that Europe’s aging population will add still further pressures on public finances in the coming decades as a result of the higher costs of ageing and lower growth as a result of fewer working-age people.

    Buti also talked down the “optimism” found in economic forecasts earlier in the year: “Doubts on continued steady output growth have emerged and the optimism of the Spring that the European economy is emerging into the post-crisis world has become more cautious”.

    The paper went on to say that the bloc’s economy is to expand around 1.9 percent in 2012 while average euro-area public debt will rise to 88.7 percent of GDP, up from 87.9 percent this year.

    Despite multiple rounds of austerity already imposed, Greece for its part will see its debtload climb to 166.1 percent of GDP in 2012, up from 157.7 percent this year.

    After a contraction in 2009, in every EU country apart from Poland, growth returned in 2010 in all but five peripheral countries, the paper said, and continued through the beginning of 2011. However, overall output level is expected to only just approach its pre-crisis level by the end 2011.

    As a result, argues the report, “the need for consolidation should not be underestimated. The years of the crisis left behind a legacy, not just of support measures that need to be reversed, but of lasting weaknesses to the public finances”.

    The document goes on to say that while governments can reduce debt levels through a mix of spending cuts or increasing taxes or a mixture of the two, governments should embrace cuts over tax hikes, as “evidence from the past shows that cuts have greater success, in terms of the effect that they have on the overall public finances.”

    At the same time however, the paper says that those countries with “fiscal room of manoeuvre”, should go more slowly in their debt-reduction measures in order to “mitigate the effects of a slowdown of the recovery on activity and jobs while sticking to their structural adjustment paths”.

    Source: EUobserver, EUD staff