Eurozone economy desperately needs internally driven growth

With economic growth in Eurozone proving to be weak, uncertain and widely varying between member states, government spending has become the only possible source of a much hoped for resumption of economic activities. On the other hand, stock exchanges have gained a lot since the beginning of the year, in a way that is not compatible with the overall bleak growth prospects. It seems that big business groups have managed to reduce labour and other costs and withhold investments in a way that has supported short-term profits to the detriment, however, of long-term prospects. At the same time, exports and activities abroad have become a solid profitability base for the big European corporations.

                        Development of total government expenditure and total revenue

                                                      2002-2012 (% of GDP)

Small and medium-sized firms, though, depend more on internal developments. They are confronted with stagnating or falling home demand, lack of finance in many countries, they are unable to effectively control overheads and concentrate their cost cutting efforts on the labour force. As a result, the common denominator in the business sector all over Eurozone has become the control or even the reduction of labour force.

As if all that were not enough to undermine employment prospects in many countries, all Eurozone governments are cutting down their spending, in an effort to reduce deficits and state debt. Unfortunately, this tendency is not restricted to deficit countries. Even Germany is reducing government spending and actually posted a fiscal surplus in 2012. In this respect, government financial statistics have become a key for economic policy decision makers.

The public sector

In view of that, Eurostat, the EU statistical service, has produced a special report on government finance. According to this survey, “In 2012, the government deficit (net borrowing of the consolidated general government sector, as a share of GDP) of both the EU-28 and the euro area (EA-17) decreased compared with 2011, while general government debt increased”. This discrepancy between deficit and debt is not difficult to explain. Even the smallest fiscal gaps will add to debt. Unfortunately, in many Eurozone countries fiscal deficits are due to government support to banks, while spending in the real economy has even been reduced.

Eurostat Table. % of GDP

Consequently, real economy is burdened in both ways. Once by losing large parts of government expenditure and at the same time having to confront an increasing tax load, to serve rising public deficits and debt. The cases of Greece, Ireland, Portugal, Italy, Spain and some more countries are perfect examples of this last double problem. All those countries, probably at the exception of Italy, have to support their failing banks and simultaneously reduce public deficits by applying draconian austerity programmes. Italy is not obliged to support its banks, but cutting down government deficit was enough to send unemployment to record levels.

Government deficits

According to EU legislation, member states are obliged to keep their government deficits bellow the benchmark of 3% of GDP. Only a few manage to attain that. If deficits are large, the ‘excessive deficit procedure’ is triggered, obliging the country to apply austerity measures, as in the case of the abovementioned member states. Eurostat found that “In the EU-28 the government deficit-to-GDP ratio decreased from -4.4 % in 2011 to -3.9 % in 2012 and in the euro area it decreased from -4.2 % to -3.7 %. Germany registered a government surplus in 2012. There were eight Member States, which recorded deficits in 2012 that were lower than the -3% threshold. Deficit ratios were greater than or equal to the reference threshold of -3 % of GDP in 19 of the Member States in 2012: the largest government deficits (as a percentage of GDP) in 2012 were recorded by Spain (-10.6 %), Greece (-9.0 %), Ireland (-8.2 %), Portugal and Cyprus (both -6.4 %), and the United Kingdom (-6.1 %)”.

It becomes clear from the above passage, that only Germany managed to produce a fiscal surplus in 2012. Given that this country accounts for anything between one-fourth and one-third of Eurozone’s economy, its miser economic policy acts as a negative catalyst, dragging euro area down. Actually Germany is the only surplus country which can safely increase public spending and deficit, due to its robust internal finance, super low-interest rates and low indebtedness of both public and private sectors. Other surplus countries like Holland or Austria are small and suffer of private sector over indebtedness.

Public debt

Coming to the public debt chapter, the long-term negative effects of the still ongoing financial crisis are more than evident. Again Greece, Ireland, Portugal, Italy and Spain are in trouble exactly due to that reason. Their imprudent fiscal policies of the past or the overexposure of their banks to toxic investments have driven their financial obligations to the sky. Under the terms of the ‘stability and growth pact’, all EU member states are obliged to keep public debt below the benchmark of 60% of GDP. Very few and comparatively the smallest of them have managed that.

According to Eurostat, “In the EU-28 the government debt-to-GDP ratio increased from 82.3 % at the end of 2011 to 85.1 % at the end of 2012, and in the euro area from 87.3 % to 90.6 %. A total of 14 Member States reported a debt ratio above 60 % of GDP in 2012. At the end of 2012, the lowest ratios of government debt-to-GDP were recorded in Estonia (9.8 %), Bulgaria (18.5 %) and Luxembourg (21.7%). In 2012, government debt-to-GDP ratios increased for 22 EU Member States”. Germany’s public debt is slightly above 80% of GDP, largely exceeding the 60% benchmark.

Undoubtedly, Eurozone’s economy is not at its best. It’s not only governments that are deep in debt though. Euro area banks are also at risk with an inflated and super leveraged investment portfolio, surpassing by almost three times Eurozone’s GDP. In comparison, US banks have assets/investments of only 1.8 times the country’s GDP. That is why Eurozone desperately needs home-made economic growth, because exports alone cannot keep the light on at the end of the tunnel.