Debt zone: what could threaten Europe's economy with record-breaking budget deficit

In 2019, the eurozone budget deficit grew for the first time in nine years and reached 0.6% of the region’s GDP. This is evidenced by Eurostat data published on Wednesday, April 22.

Note that after the end of the global financial crisis, the negative difference between the revenues and expenses of the European treasury was continuously decreasing. So, from 2010 to 2018, the indicator decreased from 6.3% to 0.5% - the minimum level for the entire time of observation.

One of the main reasons for the increase in the eurozone budget deficit in 2019 was the need to cover the economic losses from the decline in industry and the US trade wars. This point of view in an interview with RT was expressed by the expert of the Academy of Finance and Investment Management Gennady Nikolaev.

“Europeans were the main victims of trade wars, as evidenced by the collapse of industrial production in the region at the end of the year. A huge share in Europe’s GDP is played by exports, and the region’s economy is open. Because of this, the effect of the uncertainty on Brexit, as well as US tariffs against European goods and a slowdown in the PRC, was sensitive. Against this background, in 2019, the losses of European industry could reach about $ 31 billion, ”the expert noted.

It is expected that in 2020 the European budget may be under even more serious pressure against the backdrop of the coronavirus pandemic. According to the International Monetary Fund (IMF), as a result of quarantine measures, a drop in the level of trade and transportation by the end of the year, the eurozone economy could contract by more than 7%. At the same time, the deficit of the European treasury can grow by more than 12 times and reach 7.5% of GDP. Value risks becoming the highest since 1995.

According to IMF experts, Spain (9.5% of GDP), France (9.2% of GDP), and Italy (8.3%) may face the highest deficit levels. Moreover, in the region’s largest economy, Germany, budget expenditures may exceed expenditures equivalent to 5.5% of GDP.

According to RT, the head of the laboratory of the Institute of Applied Economic Research of the RANEPA, Alexander Abramov, the growth of the budget deficit can lead to a sharp increase in the public debt of the eurozone. According to Eurostat, in 2019 the debt burden of the governments of the region decreased from 85.8% to 84.1% of GDP. However, according to the IMF, in 2020 the value may increase to 97.4%.

It is noteworthy that against the backdrop of the spread of coronavirus in March, the Council on Economic and Financial Affairs of the European Union for the first time suspended the Stability and Growth Pact, the main document of the eurozone. The document was signed back in 1997 and implied a number of financial restrictions for members of the association. In particular, the budget deficit of the eurozone members should not exceed 3% of GDP, and the level of public debt - 60% of GDP.

“Previously, no country in the eurozone had the right to exceed the budget when it was approved by more than 3% of GDP. In 2019, France (3%) and Romania (4.3%) became exceptions. By repealing the Pact, the EU Economic and Finance Council decided to soften fiscal policy. Thus, states can now take loans to provide assistance to business and the population, exceeding the budget, ”Alexander Abramov explained.

Deferred losses

According to experts, supporting the economy by increasing the public debt will mitigate the effects of coronavirus for the eurozone countries. Meanwhile, an increase in the debt burden may make it difficult for the region to overcome the crisis after the pandemic. This was in an interview with RT by Vladimir Olenchenko, senior researcher at the Center for European Studies of IMEMO RAS.

“Firstly, servicing a public debt requires additional budgetary funds. In the future, due to the high debt burden, governments will have to limit spending. Most often this happens due to salaries of civil servants, pensions and other social benefits. After the pandemic is completed, it will be necessary to stimulate the population’s demand for goods and services, but due to debt obligations it will be more difficult for governments to achieve this, ”the expert explained.

According to Gennady Nikolaev, the countries of Eastern and Southern Europe run the risk of finding themselves in the most difficult financial situation. As the expert explained, in many respects these states live off subsidies from larger economies in the region, such as Germany and France. At the same time, in 2020, the volume of monetary support may noticeably decrease.

“Today, the EU’s economic locomotives are France and Germany. Other countries are constantly trying to get financial aid out of the general budget, despite the fact that their participation in it is minimal. Now the expenses of these states are largely financed by Berlin and Paris, but now it’s clear that the Germans and French will first of all solve their financial problems, because of which they will spend less “on charity,” Nikolaev explained.

Note that at the end of March, as one of the emergency measures to help the economy, the European Central Bank (ECB) announced a program for the purchase of bonds worth € 750 billion. So, the ECB turned on the printing press and began to buy government debt securities of eurozone countries for the issued money. Thus, the regulator injects additional cash into the financial system.

According to Gennady Nikolaev, the actions of the ECB should support financial stability in a period of uncertainty, but at the same time they risk turning into a weakening euro in the long term.