As became very clear during the crisis, it is essential to keep public accounts healthy during years of strong growth as this helps to soften the impact of a recession without awakening fears of debt sustainability in the long term. The effective management of public accounts is especially relevant in a monetary union such as the euro area since a country cannot resort to unilaterally reducing its debt burden by devaluing its currency. We will analyse the expected developments in the public finances of the region's main countries now that growth will gradually gain traction in the coming years, as the evidence suggests.
As we all know, the starting point is not at all encouraging: the euro area's public debt has gone from 65% of GDP in 2007 to 94.2% in 2014, an all-time high. This increase was particularly dramatic in countries such as Ireland and Spain which, in spite of starting from a very low level (24% and 35% in 2007, respectively), were particularly hard hit by the consequences of the crisis. However, the bulk of the evidence available suggests that 2015 will see an end to this upward trend, helped by several factors. The most important is the gradual recovery in the rate of economic growth, resulting in a reduction in the main items of expenditure and a rise in revenue. This reduction in public expenditure will also be supported by much more expansionary monetary policy. The measures taken by the European Central Bank will keep interest rates very low over the coming years, temporarily reducing the debt burden. However, it should be noted that, according to European Commission forecasts, the only country which will see a clearly downward trend in its public debt is Germany. In the next two years the rest will maintain a level of debt that is only marginally lower than the current one.
The expected evolution of the deficit reflects the impact of the economic recovery on public accounts. It also provides some clues regarding the effort that will be made by different countries to improve them. In the euro area as a whole, the public deficit is expected to fall to 2% in 2015 after reaching around 6% of GDP in 2009 and 2010. Logically this figure indicates that the deficit of many countries is clearly below 3%, the level that all countries agreed to set as the maximum limit in the Maastricht Treaty which they have recently ratified. However, several countries will still have higher deficit rates, such as Spain (4.5%), France (3.8%) and Ireland (3.6%).
The Commission also looks at the structural public deficit1 for a more detailed analysis of the fiscal effort of countries in the euro area. Although this variable's error margin is very high,2 it is still one of the most widely used benchmarks to assess the fiscal policy carried out by each Member state. It is significant that the Commission expects the reduction in structural deficit to be very limited, both in 2015 and 2016. Put another way, the reduction in public deficit we will see in many countries in the euro area will largely be due to the economic recovery.
In summary, the improved macroeconomic situation provides a good opportunity to speed up fiscal consolidation and underpin the sustainability of public accounts in the medium and long term, and such a chance should not be wasted. This is particularly important for countries with high levels of debt since, if they do not reduce their debt in time, their capacity to react in any future crises will be limited.
1. The structural deficit corresponds to the public deficit a country would have if it fully used all its production factors (capital and labour). In other words, when its actual GDP is the same as its potential GDP.
2. See the Dossier: «Potential GDP: a key but unclear concept» in the Monthly Report of May 2013 for a detailed analysis.
