By Nick Mann | 22 February 2013
Subdued economic growth will push up the combined debt burden of European Union countries despite falling budget deficits, the European Commission warned today.
In its Winter forecast, the commission said the implementation of ‘sizeable’ fiscal adjustment programmes in many EU member states meant budget deficits had fallen last year and would continue to do so in 2013 and 2014.
The combined deficit of EU member states fell from 4.4% of gross domestic product in 2011 to an estimated 3.8% in 2012 and is forecast to fall to 3.4% this year and 3.1% in 2014 as the economic recovery gains momentum. In the eurozone, a similar trend is forecast, with the 4.2% of GDP deficit recorded in 2011 having fallen to an estimated 3.5% last year. It is then expected to drop to 2.8% of GDP this year and 2.7% in 2014.
Last year’s deficit reductions were driven by improvements in revenues, which are expected to peak at 46.8% of GDP in the eurozone and 45.7% of GDP in the EU this year, the report noted. Consolidation is 2013 and 2014 will also be supported by cuts in government spending, and in particular discretionary spending on wages, public investment and consumption, while spending on social transfers will increase slightly, it added.
The commission noted, however, that fiscal consolidation was ‘weighing on growth in the short run’ in particular in ‘vulnerable’ member states, which are likely to see weak growth for the rest of this year. The EU economy is expected to grow by just 0.1% of GDP this year, while the eurozone’s is forecast to shrink by 0.3%, before next year sees growth accelerate to 1.6% and 1.4% respectively.
The weak growth forecast this year is expected to push up debt-to-GDP ratios. The eurozone’s debt rose to an estimated 93.1% of GDP last year and is expected to increase further to 95.1% this year and 95.2% in 2014. Similarly, the EU’s debt-to-GDP ratio reached an estimated 87.2% of GDP last year and is forecast to increase further to 89.9% in 2013 and 90.3% in 2014.
Despite this, the commission said fiscal consolidation was ‘necessary and should lift economic prospects in the medium- and long-term’. Olli Rehn, the commission vice-president for economic and monetary affairs and the euro, called on member states to maintain their adjustment policies.
‘The decisive policy action undertaken recently is paving the way for a return to recovery. We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is underway, delaying the needed upswing in growth and job creation,’ he said.
