The eurozone’s deficit increases have been higher than any downturn in the last 35 years, according to yesterday’s OECD report on the region.
The yearly increase in the budget deficit as a share of GDP is “very large by historical standards”, the OECD says. It substantially exceeds the increases in previous downturns in 1975, 1981, 1995 and 2001.
Current debt levels are “elevated” by historical comparison, the OECD observes in its latest Economic Survey of the Euro Area. They have reached historical highs in many countries. The debt-to-GDP ratio for eurozone countries doubled since 1979.
Eurozone countries will need credible and detailed plans for consolidation if they want to maintain the credibility of fiscal policy and a low risk premium on borrowing costs, the OECD warns.
Over the past two years the fiscal position deteriorated sharply with the budget deficit increasing from 0.7 per cent of GDP in 2008 to 6.3 per cent in 2009. The debt-to-GDP ratio measured on the Maastricht basis increased by over 9 percentage points to 79 per cent.
Consolidation will therefore have to be longer and, for many countries, larger than it has been after previous downturns. The OECD says further measures to reduce this debt at a faster pace will require “an exceptional effort”.
The OECD says more credibility is necessary for financial stability because fiscal weakness can spill over into financial markets and the banking system.
“The submission of stability programmes and revised medium-term budgetary strategies by national authorities in early 2011, as well as national budgetary processes, provides an opportunity to give greater clarity about fiscal policy actions for the coming years,” the OECD says.
“Many eurozone countries will have difficulties reaching the objectives set by the stability programmes and then the medium-term objectives will be difficult given the scale of the consolidation required.”
The degree of indebtedness, however, varies considerably from country to country. In Belgium, Greece and Italy debt levels are particularly high. In Finland, Luxembourg, Slovakia and Slovenia they have been particularly low.
The deterioration in the general government balance as a share of GDP was less than the eurozone average for Austria, Germany, Italy and Luxembourg.