Eurozone: Statistics don’t tell the whole story

Algirdas Šemeta, Member of the European Commission in charge of Taxation and Customs Union, Audit and Anti-Fraud, participated in the conference entitled ‘Towards implementing European Public Sector Accounting Standard’, which was organised in Brussels by Eurostat, on 29 and 30 May 2013, (EC Audiovisual Services).

Government sector deficits in Eurozone after having peaked in 2009-2010 are now not only levelling out but actually decreasing. According to Eurostat, the EU statistical service, in the first quarter of 2013 “ the seasonally adjusted general government deficit to GDP ratio was -3.5 % in the euro area (EA-17) and -3.8 % in the European Union (EU-27). In the previous quarter it was -3.7 % in the EA-17 and -4.2 % in the EU-27”. During the same three-month period in Eurozone and EU-27 general government total revenue amounted to 46.5 % and 45.3 % of GDP respectively, while total expenditure amounted to 50 % and 49.1 % of GDP.

EU-27 and EA-17 quarterly government net lending (+)/ net borrowing (-), in % of quarterly GDP, seasonally adjusted

           Source: Eurostat

At this point it must be reminded that in the two-year period of 2009-2010 Eurozone and EU27 government deficits skyrocketed to the region of 7% of GDP on the average, because a number of EU countries nationalised the huge toxic assets of their banks. In a matter of months those EU governments undertook the obligations of their countries’ lenders amounting to tens of billions, thus triggering the credit crisis of the European Union. This was the case of Ireland, the UK, Spain and even Germany. In Greece, Portugal and Italy it was not the banks that sent the countries to their worst over indebtedness but the sovereign borrowers. All along during the first decade of the new Millennium successive Greek governments kept mindlessly borrowing in order to finance excessive public spending.

Deficits nearing 3%

Given that according to the European Union rules the allowed government deficit is set at 3% of GDP, Eurozone is now much closer to it than the EU27. The EU27 government deficit appears much larger than the relevant Eurozone figure because the United Kingdom’s fiscal deficits are persistently high in the region of 5% to 7% of the GDP. The large size of the British economy weighs heavily in the EU27 data. In short the UK exchequer didn’t borrow only to recapitalise almost all the major banks of the country back in 2008-2009 but also to finance excessive government spending.

Despite the persistent but now decreasing government deficits during the past few years, inflation was and is still kept at bay because the European Union and more so the Eurozone economy entered in a long-term recession. Inflation peaked in October 2011 with around 3% in both the EU27 and the euro area. Before and after that, monthly inflation pressures have been minimal with around 0% in the summer of 2009 and now 1.6% in July 2013. Low inflation readings though carry both good and bad news.

Low inflation

For one thing it’s good news because the European Economy appears competitive with very low price increases, but at the same time slow inflation pressures betray a persistent recession. In any case the European Union economy is now thought to have left behind the bottom of the curve and preparing to enter in the upwards pointing part of it (growth). This is an even more important accomplishment because the new growth path, albeit slow, will hopefully be attained and maintained without excessive government deficits and overspending artificially supporting it.

                          Annual inflation (%) in the euro area and European Union

       Source: Eurostat

The problem is however that the social and the political costs going together with the above mentioned recipe may prove unbearable for a number of Eurozone countries. The sociopolitical developments in the south have advanced deeply in a risky zone and the entire arrangement seems to be prone to accidents. Fragile coalition governments in Greece, Italy and Portugal may collapse at any moment.