The impact of public debt and the risk of double-speed Europe

The impact of public debt and the risk of double-speed Europe

Introducing the Fiscal Monitor of the International Monetary Fund (IMF) published a few days ago Updated and complete picture of the trend of public accounts in the world.

However, in the following, I will limit myself to a few considerations regarding public financial developments in developed countries. I conclude it The widening gap between debt levels in northern and southern Europe This could lead to future tensions in the euro area, which should not be underestimated.

As we know, the Kovid crisis has increased the general deficit of all developed countries. However, the extent of the deficit varies greatly from country to country. Three main groups can be identified. The first is the countries that have brought the 2020 deficit to levels above 10 percent of GDP. There are four: Israel, United Kingdom, Japan, United States. In the latter country, the deficit was close to 16 percent of GDP, having previously exceeded its value between 1943 and 1945.

The second group includes countries with a deficit of about 10 percent: Italy here and other “Mediterranean” countries (France, Greece, Spain).

The third group includes countries with less than 3 to 6 percent of GDP. Switzerland, South Korea, and all the “Nordic” countries (Germany, Sweden, Denmark, Finland, Ireland, Holland) are here. Portugal also has the highest values ​​(6 per cent) in the group.

These differences between groups of countries reflect three scenarios. First, the starting point: Countries that already had low deficits before the crisis, or surplus countries such as Germany and the Netherlands, coped well. Second, the decline in GDP: When GDP fell the most, state revenue suffered the most and expenditure increased the fastest. Third, the weight of cultural factors is probably: in short, Germany has always been very careful.

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Whatever the reasons, the different trends in the general deficit in 2020 and, as predicted by the IMF, the public debt in different countries will fluctuate further in 2021. This deviation is especially problematic in the euro area. Over a two-year period, the IMF expects public debt to increase by an average of 9 percentage points between Finland, Germany and the Netherlands. France, Italy, Greece and Spain average 21 percent points, Was already going into high debt. These trends will continue in the years to come.

For example, what happens to Italian public debt compared to Germany? The gap between Italian and German debt is already at an all-time high in 2019 (75 per cent) and will reach 92 per cent in 2024. (62% for Germany and 154% for Italy).

This gap between the northern countries and the southern countries in the trend of public debt will make it very difficult to find an agreement on how to amend the rules of the stability agreement and when they will come into force. . But the real problem is that there are huge differences in the amount of public debt between euro countries Otherwise it weakens them To the rise in interest rates caused by the future surge of average inflation in the region (target of BC action).

If inflation rises, Especially in countries like Germany, which seem to be getting out of the crisis early, these countries will be tempted to raise interest rates: there is no need to worry about the consequences of this increase on their public debt. Level. The rise in interest rates will have far-reaching repercussions for the southern countries. Kovid It is true that the increase in public debt over the past two years is, above all, due to the ECB and legally nationalized banks (90 per cent of the BTPs bought by the European System of Central are bought by the Bank of Italy). Banks). This indicates that as long as these bonds are held by national banks, the increase in interest rates will not affect the general balance sheets (because the profits of the national banks are mainly transferred to the states).

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But if inflation rises The ECB may have to reduce its holdings of these securities to re-absorb the excess liquidity created by Kovid over a two-year period.. Therefore, rising inflation and interest rates will weigh heavily on the debt of different countries and create increasing tensions. This is a risk that should not be underestimated.

at this point I must assure the reader that there is an easy solution. If the South Indian countries, after all, implement reforms to restart GDP growth (hence state revenue) on a consistent basis, public accounts can be more easily fixed. Hence the importance of the next Pnrr etc. I do not dwell in it. I have repeated it many times.

But the question will not be sent Brussels Beautiful plan. I have no doubt about it. The question is whether this will happen in the next few years. We cannot make mistakes even for the reasons mentioned above.

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