Public debt in the eurozone and the EU, measured as a percentage of gross domestic product (GDP), has risen again three years later. It has barely risen by half a point in both cases, but it was enough to cut a streak that had been going on since the beginning of 2021, when it peaked due to the huge resources consumed by the economic measures deployed to cushion the impact of the pandemic. The rebound in the economy after falling sharply due to Covid-19, plus the soaring inflation in 2022 and much of 2023, helped a lot to reduce the huge mountain of debt that had accumulated in 2020. But both circumstances have been easing and liabilities have increased slightly at the beginning of this year, to an amount equivalent to 88.7% of eurozone GDP, according to the data. Eurostat.
The break with the trend that has been maintained for three years has a symbolic aspect. This summer, the EU is launching new fiscal rules that have the main objective of reducing the debt that the public sector has been accumulating after going through three systemic crises in the last 15 years (the financial crisis of the past decade, the one caused by the pandemic and the one brought on by the increase in energy prices that ended up triggering inflation). In all cases, the State came to the rescue of the economy and this is how the liabilities reached the historic level of 99.3% of GDP at the beginning of 2021 in the euro zone and 92% in the EU as a whole. Then a fall began that is now slightly nuanced, to 88.7% and 82% of GDP, respectively, seen at the beginning of this year.
In the analysis broken down by country, it has been important that there has been an upturn in Spain, France and Italy, three of the four major economies in the Eurozone. These increases have been offset by the performance of Germany and the Netherlands. The breakdown also serves to point out to what extent it will not be easy for the most indebted countries to reduce their liabilities – the first three have debt ratios above 100% of GDP – compared to those with healthier public accounts. And, precisely, they are the same ones that will have to present fiscal adjustment plans to the European Commission in September to reduce these levels of indebtedness and, at the same time, maintain adequate investment levels to avoid losing competitiveness in the digital and energy transitions.
When assessing the evolution of the debt ratio, one must take into account not only the total volume of money owed by the public sector (almost 13 trillion euros in the first quarter of the year) but also the evolution of nominal GDP, that is, the GDP from which inflation is not discounted. The debt ratio is nothing more than the quotient between the two. Therefore, if the economy grows a lot, the indicator can improve without making budgetary adjustments, which is what has happened in recent years. In Spain, for example, in 2023 GDP grew by 7% in nominal terms compared to 2.1% when the change in prices is subtracted. This difference is so large because of inflation.
This has also played an important role in tax collection. Rising prices have caused state revenues, especially from VAT, to rise sharply in recent years. This has also helped to reduce the red figures in public accounts.
This is one of the reasons why Daniel Fuentes, professor of economics at the University of Alcalá, points out that the period of rapid and easy reduction of the debt ratio is coming to an end. Now there are other circumstances to take into account, he adds, such as economic stagnation.
Ángel Talavera, director of the European Economics department at Oxford Economics, believes that we should wait and see if the data for the first quarter show a trend. “Although the data are seasonally adjusted, I think they contain quite a bit of noise and can often lead to premature interpretations,” he warns. “Having said that, it does seem clear that there is a slowdown in the process of reducing deficits in many countries, especially France, which is the most worrying, and I think at the European level we will see deficit and debt figures in 2024 quite similar to those of 2023,” he adds. This last thesis is supported by the fact that the year-on-year deficit in the first quarter of this year in the euro zone is 3%, just one-tenth less than a year ago, according to the data. Eurostat.
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