According to the Eurostat figures published today, progress was made on deficit reduction in the eurozone in 2012, even if in some cases targets were missed and the EU was obliged to make concessions. Last year 8 of the 17 euro countries reduced their budget deficit in relation to GDP under pressure from the EU and the financial markets. In Austria and Cyprus the deficit ratio was unchanged on 2011, in the remaining 7 countries it deteriorated (including in the three countries Finland, Estonia and Luxembourg, whose public finances are in fact among the most sustainable in the eurozone and who are not at the epicenter of the financial crisis).Germany was the only country to record a small budget surplus. The overall public deficit in the eurozone improved to -3.7% of GDP (from -4.2% in 2011). The debt ratio rose in all member states apart from Greece (thanks to the haircut), in Germany it has been relatively stable since 2010. The overall eurozone figure climbed from 87.3% to 90.6% in 2012, i.e. close to the 90% mark, which is currently being discussed as a possible benchmark at the international level. Public debt is still worryingly high at well over 100% in Ireland, Italy, Portugal and Greece.
Given the fragile economic picture in Europe the policy debate has shifted: while consolidation drives should be continued, they should be supplemented as far as possible with pro-growth initiatives (not large-scale stimulus packages). A new acronym for a supposed crisis quartet is doing the rounds: FISH, referring to France, Italy, Spain and Holland. Contrary to plan, France will probably be well awry of the 3% mark with 3.7% this year. The acting government in Italy has raised the deficit target for 2013 to 2.9% of GDP (a lifting of the EU deficit procedure is feasible).Spain is considering relaxing its austerity drive. Even “fiscal hawks” like the Netherlands are extending consolidation deadlines. Further EU concessions are on the cards.
Although the signs that the debt crisis has been overcome look increasingly better, repairing public finances will be a long process. The envisaged balanced EMU budget is still a long way off, we are forecasting a budget deficit ratio of 2.9% this year. Pursuing "austerity at all costs“ obviously does not make sense, but persistent budgetary discipline is called for. And of course reforms that foster growth potential should be continued, thereby facilitating consolidation.