In an international comparison, EMU as a whole fares relatively well with a debt ratio of 78.2 percent of gross domestic product (GDP). Japan’s debt ratio of around 190 percent is substantially higher and the USA, with 83.1 percent of GDP, also fares worse than the euro area.
Greece, along with other euro area countries with financial problems, must now present a convincing fiscal consolidation concept. Empirical studies and various country examples from the past show that a drastic consolidation drive can have a positive impact on growth. “A plausible consolidation program eliminates false incentives, buoys investment and private consumption and, in the medium term, can trigger a surge in growth,” said Heise.
Should Greece implement an austerity package which lowers the borrowing requirement in 2010 to the planned 8.7 percent of GDP, the Allianz economists expect GDP to fall by around 5%. The economic nosedive will start to slow as early as 2011/2012. The markets will honor the reduction in new borrowing and spreads on Greek government bonds will fall substantially. The level of debt is already likely to fall slightly in 2013. All told, this means that, even with a rigorous austerity drive, the situation of Greek public finances will remain very difficult for a longer spell, but the momentum of the rise in debt can be stopped soon.