Fiscal Challenges in the Euro Zone

• Published date: 01 December 2012
• DOI: http://doi.org/10.1111/j.1748-3131.2012.01231.x
• Date: 01 December 2012
• Author: José Manuel Campa

Fiscal Challenges in the Euro Zone

José Manuel CAMPA†

IESE Business School

Fiscal challenges in the Euro zone have been at the center of global economic concern in the last 2

years. Despite lower debt burdens,and higher fiscal effor ts takenby Euro countries, a perception of

high fiscal risk remains. This paper reviews the fiscal challenges facing the Euro area countries and

the measures taken at the Euro area level to manage short-term pressures and to enhance long-

term functioning of the area, as well as the main lines of national specific reforms. The paper

shows the unique characteristics of the Euro area that still raise concerns to foster stability and the

challenges to address them.

Key words: economic integration, Euro, debt sustainability, Sovereign debt

JEL codes: F36, H63

1. Fiscal Performance and Challenges in the Euro Area

The fiscal performance of the Euro area had not been exceptionally expansionary over

the period of the large economic expansion leading up to the economic crisis. In fact, the

evidence shows that it had been quite good, at least relative to other developed econo-

mies. According to the International Monetary Fund [IMF] (2011b), the debt to gross

domestic product (GDP) ratio of the 12 original Euro area members decreased from

71.9% in 1999 to 66.8% in 2007. This amounts to a decrease of 5.1 percentage points in

the debt to GDP burden for the Euro area in this period. This compares to increases in

the same ratio of 1.5% increase in the USA, 53.9% in Japan, and 0.3% in the UK. There-

fore, the Euro area was the only large developed economy, jointly with Canada, to

decrease its public debt burden and make it significantly lower than that of other devel-

oped countries.

The buildup to the economic crisis increased the potential vulnerability of all devel-

oped countries to their fiscal situation going forward. However, the increase in the debt

burdens of the Euro area countries resulting from the crisis was again not particularly

different from that of other non-Euro area developed countries. Between 2007 and 2011,

the debt to GDP ratio of the 12 original members of the Euro area increased by an esti-

mated 22.4% of GDP, which again compares positively with increases of 36.8% in the

UK, 45.5% in Japan, and 37.7% in the USA (see Table 1).

I am grateful to Takatoshi Ito, Sahoko Kaji, and Kazuo Ueda, the Editors of the Asian Economic

Policy Review (AEPR), and participants in the “Fiscal Policyand Sovereign Debt” AEPR Conference

for their helpful comments. I also wish to thank Luis Esteve for excellent research assistance.

†Correspondence: José Manuel Campa, Camino del Cerro de Aguila 3, 28023 Madrid, Spain.

Email: jcampa@iese.edu

bs_bs_banner

doi: 10.1111/j.1748-3131.2012.01231.x Asian Economic Policy Review (2012) 7, 180–197

© 2012 The Author

Asian Economic Policy Review © 2012 Japan Center for Economic Research

180

It is also true that European countries, and Euro area countries, in particular, have

been much more aggressive than other developed countries in taking measures to tackle

their fiscal challenges from the crisis. This applies not only to countries under an IMF/

Euro financial support program (Greece, Portugal, and Ireland) or under clear market

pressure (Spain and Italy), but also to the core of the area. According to estimates by the

IMF (2011b) in September of last year, none of the four large Euro area countries

required a fiscal adjustment to bring down their debt to GDP ratio to 60% by 2030 that

is larger than the adjustment required by the USA, the UK, or Japan (see Table 2). In

addition, by 2011, the Euro area countries had already taken much larger measures to

achieve such a target (60% debt to GDP ratio in 2030) than those of the non-Euro area

Tab le 1 Fiscal deficits, debt, and interest burden to GDP

2009 2010 2011 2012 2013

Overall fiscal balance (%GDP)

Spain -11.2 -9.3 -8.0 -6.8 -6.3

France -7.6 -7.1 -5.7 -4.8 -4.4

Italy -5.3 -4.5 -3.9 -2.8 -2.3

Germany -3.2 -4.3 -1.1 -0.7 -0.1

UK -10.4 -9.9 -8.6 -7.8 -6.5

USA -13.0 -10.5 -9.5 -8.0 -6.4

Canada -4.9 -5.6 -4.9 -4.4 -3.6

Japan -10.8 -9.3 -10.1 -10.2 -8.8

General government gross debt (%GDP)

Spain 53.6 60.8 70.1 78.1 84.0

France 79.0 82.4 87.0 90.7 93.1

Italy 115.5 118.4 121.4 125.3 126.6

Germany 74.4 83.2 81.5 81.6 79.8

UK 68.4 75.1 80.8 86.6 90.3

USA 89.9 98.5 102.0 107.6 112.0

Canada 83.6 85.1 85.5 86.7 84.7

Japan 216.3 219.0 233.4 241.0 246.8

Interest expenditure, general government (%GDP)

Spain 1.8 1.9 2.2 2.4 2.6

France 2.4 2.4 2.6 2.8 3.0

Italy 4.6 4.5 4.9 5.4 5.6

Germany 2.7 2.5 2.4 2.3 2.3

UK 1.9 2.9 3.1 3.2 3.2

USA 2.5 2.6 3.0 3.1 3.3

Canada

Japan 2.6 2.7 2.7 2.7 2.7

Shaded areas indicate IMF estimates.

Source: IMF (2012) and European Commission (2011a).

José Manuel Campa Fiscal Challenges in the Euro Zone

© 2012 The Author

Asian Economic Policy Review © 2012 Japan Center for Economic Research 181