Has the time of budgetary restrictions returned to Europe? Growth is quite weak and a series of countries have accumulated debts, notably Italy and Spain. Conversely, Greece’s situation continues to improve. Explanations from our correspondents.
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Europe is caught in a financial vise. Country debt is exploding in almost all countries, as evidenced by the situation in France where the government is forced to tighten the screw, to achieve 12 billion savings. In Italy, growth forecasts for 2024 stand at 0.7% and the situation calls for strong responses. In Spain, the debt is decreasing, but the country remains fourth among the countries with the most debt. First place is still occupied by Greece, but its primary debt is improving.
Weaker growth than expected in Italy
The bad news arrived in February from the European Commission. The 2024 growth forecast rose to 0.7%, half a point less than the figure on which Rome built its budget. This represents a hole of 10 billion euros to fill, knowing that the management of public finances is a major subject, even if the rating agencies have not downgraded the country’s rating at the end of 2023.
At 140% of GDP, Italy’s debt is the second highest in the eurozone, behind that of Greece. As for the deficit of more than 4%, it exposes the government to reprimands from the European Union, given that the rules of good accounting are back after the Covid years.
Possible solutions
Giorgia Meloni’s government refuses to increase taxes and is counting on a privatization plan, which could bring in around twenty billion over several years. State shares in La Poste, in the energy giant and in the railways could be sold, but this can at most contain the deficit and not solve the problem. Another avenue is the fight against tax evasion which deprives the Italian state of many resources.
There is therefore urgency, because one of Italy’s greatest weaknesses is its demographics. The country is aging and therefore the retirement system is particularly expensive. Because of this, the OSCE anticipates a debt that would jump and become difficult to manage within 20 years. Italy has difficult decisions to make if it does not want to find itself faced with a serious crisis in the medium term.
In Spain, the government is reassuring
Certainly, at 107.7% of GDP, the debt is high, but at least it is falling and its level respects the Madrid commitments. 107.7% is four tenths less and therefore better than what was set in the budget plan sent in October 2023 to Brussels. For the Minister of Economy, Carlos Cuerpo, this is proof that “fiscal responsibility is compatible with sustainable and fair growth”.
Not only is this compatible, but in reality growth is the best explanation for the relative decline in Spanish debt. GDP was up 2.5% in 2023. So even if debt rises slightly, it represents a smaller share of GDP. There is an arithmetic effect due to growth, more than a reduction in public spending or an increase in revenue.
The European Commission, which is not always very kind to countries that are heavily in debt, has nevertheless given the green light to Spain’s budgetary plan. However, she accompanied it with warnings, since, for Brussels, the Spanish tax situation is a very difficult challenge and above all, the Commission does not see, she said “credible medium-term tax strategy”.
Still no budget for 2024
At present, Spain has still not approved its budget for 2024. One of Spain’s macroeconomic difficulties is its political weaknesses. The government does not have a stable absolute majority in Parliament. It relies on the Socialist Party and Sumar, of the radical left, the two components of the executive, but it is not enough. He must supplement these forces with other groups, notably Catalan separatists. However, the government is busy negotiating an amnesty law with these separatists and in the meantime, the budget is not moving forward. The Minister of Finance gave herself until the end of March to complete the file and the 2023 budget was extended to compensate.
In Greece, the situation is improving
Greece experienced 10 years of economic hell from 2009 to 2019, but now it has gone from the worst performer in the euro zone to the best. In 2024, its debt should return to 146% of GDP, according to official data. The situation in the country is, without a doubt, better than 10 years ago and the European Commission even ceased its surveillance of the country in 2022, putting an end to 12 years of humiliating supervision. The Greek debt rating was moved out of the speculative category and into the investment category. In other words, confidence is returning and what attracts investments is a guarantee of quality in liberal logic.
But these figures hide another reality, that of an overall fragile improvement. Investments have created jobs, but only in the construction and tourism sector, which alone accounts for 25% of the country’s GDP. These jobs are, in the overwhelming majority, part-time and there are no factories being set up, no SMEs being created, but SMEs are the backbone of the Greek economy, which which means that its fundamentals do not change.
We still rely on the merchant navy, which has recently been losing momentum, and on tourism which remains very vulnerable, as we saw with the Covid crisis and regional conflicts. Inflation in the country is one of the highest in the euro zone and insecurity is terribly high.
The reduction in debt will above all help the country to borrow on the markets this year at very attractive rates, but this will be at the cost of real economic and structural development of the country. However, this one is slow in coming.