Eurozone Debt Summary

The European Commission's Communication Department, Europa, recently released its debt and deficit data for all of 2011.  In this posting, I'll hit a few of the high points showing how this turbulent year in the Europe has impacted government debt levels.

First, it's important to note that, as part of its original mandate, countries in the Eurozone set up debt and deficit targets and a mechanism that dealt with nations that exceeded these targets back in 1999 when the euro was created.  Almost laughably small in today's terms, here are the two criteria by which Member States were forced to abide under threat of sanction:

1.) The budget deficit must not exceed 3 percent of gross domestic product.

2.) Public debt must not exceed 60 percent of gross domestic product.

If Member States exceeded these guidelines, the European Commission wielded a wet spaghetti noodle of threatening actions termed the Excessive deficit procedure or EDP.  Here is a list of ongoing excessive deficits that are being reviewed, the date of the EC report and the deadline for correction in the last column:

Notice how the gap between the initial finding of excessive deficits and the deadline for corrective action can be several years.

For your illumination, here are the procedures that the European Community has taken against Greece since 2009:

Now, back to the latest annual EC debt and deficit data.  For your information, the term EA17 stands for the 17 nations that currently use the euro as their currency and the term EU27 includes those nations plus all other nations in the European Community that do not use the euro (i.e. the United Kingdom among others).

In 2011, the level of government deficit-to-GDP ratio in the EA17 decreased on a year-over-year basis from 6.2 percent in 2010 to 4.1 percent in 2011.  In the EU27, the deficit-to-GDP ratio decreased on a year-over-year basis from 6.5 percent in 2010 to 4.5 percent in 2011.  Note that both levels are still well above the deficit limit of 3 percent as noted above.

In 2011, the level of government debt-to-GDP was not as co-operative.  In the EA17, government debt-to-GDP rose from 85.3 percent at the end of 2010 to 87.2 percent at the end of 2011 and in the EU27, government debt-to-GDP rose from 80 percent at the end of 2010 to 82.5 percent at the end of 2011.

The raw numbers are also interesting.  Total government deficit in the EA17 fell from €571,050 million to €387,617 million, a drop of €184,433 million or 32 percent.  Nonetheless, total government debt in the EA17 rose to a new record of €8,215,289 million ($10.679 trillion), up 4.8 percent from the previous year.  Total government deficit in the EU27 fell 30 percent on a year-over-year basis €565,117 million.  Total government debt in the EU27 rose by 6.2 percent to €10,421,987 million ($13.55 trillion).  This represents roughly one-third of the world's entire stock of public debt according to the Economist's global debt clock.

Here is a chart summarizing the growth in debt and changes in deficits since 2008:

It is interesting to look through the details of the report and find that even Germany, the pillar of fiscal prudence, has a debt-to-GDP ratio of 81.2 percent, well in excess of the 60 percent target.  The worst debt offender is Greece with a debt-to-GDP ratio of 165.3 percent at the end of 2011.  Out of the 27 EU27 nations, only 13 are under the 60 percent debt-to-GDP target and these consist mainly of the former Iron Curtain countries and Scandinavia.  Surprisingly, in light of the Greek debacle, Ireland is the worst offender on the spending side, ringing in a massive 2011 deficit of 13.1 percent of GDP.  Only 10 of the 27 EU nations have a deficit-to-GDP ratio that is below the 3 percent target, again, mainly the former Iron Curtain countries and Scandinavia.  This does not particularly bode well for the future since many of these nations had deficit spending that exceeded guidelines during and after the Great Recession of 2008 - 2009.  As well, if the impact of low debt-to-GDP ratios of the smaller economies of the former Iron Curtain countries were subtracted from the average debt and deficit-to-GDP numbers, the situation would look far, far worse. 

After reading and hearing so much about the Eurozone debt crisis over the past 18 months, it is interesting to see it all put into context.  What is concerning is that, while the growth in deficit spending seems to be improving marginally, the level of indebtedness marches ever higher.  Fortunately for most governments (the PIIGS nations excluded), interest rates on sovereign debt remain at generational lows.   Should interest rates begin their march back to normal levels, it will be almost impossible for even the most prudent of nations (i.e. Germany), to keep their spending levels from growing faster than their revenues.