FRANKFURT: Europe’s government-debt crisis is no longer panicking financial markets. But it won’t end until the region’s economy starts growing strongly again.
And that will be a while.
The economy of the 17 countries that use the euro has shrunk for two straight quarters a common definition of a recession and analysts forecast little or no growth until 2014.
Without growth, there won’t be enough tax revenue to help countries like Greece, Italy, Spain and Portugal narrow their deficits and slow the expansion of their debts. Their debt burdens as a per centage of economic output, a key measure of fiscal health, look worse by the day.
The eurozone’s combined debts are equal to about 93 per cent of the region’s gross domestic product this year and that figure is forecast to rise to peak at 94.5 per cent next year. In 2009, the eurozone’s debt-to-GDP ratio was 80 per cent. A ratio above 90 per cent is generally considered high and can put pressure on governments’ borrowing costs.
“The worrying thing about the projections is, the peak seems to keep moving,” says Raoul Ruparel of the Open Europe think tank.
The panic in European financial markets has eased in recent months largely because of aggressive action by the European Central Bank. The ECB said on Sept.6 that it was willing to buy unlimited amounts of government bonds issued by countries struggling to pay their debts. That pledge quickly lowered borrowing costs for Spain and Italy, which earlier in the year faced the same kind of financial pressure that forced Ireland, Greece and Spain to seek bailouts.
But stemming the crisis and heading off a default by one or more countries aren’t the same as stimulating growth. The United States economy remains weak several years after actions by the Federal Reserve helped arrest its financial crisis.
Europe’s economy is being held back for several reasons: Austerity. Whether they got into trouble by overspending or after rescuing banks from a real-estate collapse, European governments are tackling their debts the same way: By raising taxes and cutting spending, including wage cuts for public sector workers. Italy slashed its deficit by 2.8 per cent of GDP this year, but economists estimate that reduced growth by 1.5 per centage points. Less spending by the government and less spending by consumers who gave more of their income to the government were a drag on the Italian economy.
Shaky banks. Banks reeling from the financial crisis are making it harder and more expensive for businesses in the hardest-hit countries to borrow. That’s crimping investment and hiring by these companies across southern Europe. Companies in Greece or Portugal are often paying twice as much interest on loans as their German competitors.
Consumers are holding back. Wage cuts have weighed on family budgets, and people are saving more because they’re worried about further economic shocks. Together, these trends have reduced consumer spending by about 1 per cent this year.
Anti-business regulation. Laws in many European countries make it hard for companies to lay workers off in lean times, and that makes employers reluctant to hire. Bureaucracy chokes the process of starting a business or exporting goods. Greece’s tax accounting rules were so onerous permitting large penalties for minor paperwork errors that the EU demanded the entire rulebook simply be abolished. Parliament finally complied last week.