IW: Only Greece and Portugal have realistic debt reduction prospects for next two decades

LAST UPDATE 20:07

Without new debt rules, the burden on several euro countries threatens to continue to rise uncontrollably. This shows a survey by the German Economic Institute (IW), for five countries. In short, the survey finds that only in Portugal and Greece is it realistic to reduce government debt relative to GDP over the next two decades. In contrast, debt ratios in France, Spain and Italy are likely to continue to rise.

These five countries, according to the Institute, already significantly exceed the requirements of the Maastricht Treaty for the protection of the euro. The debt ratio in France, Spain and Portugal is about twice the European benchmark of 60% of GDP. In Italy it is two and a half times higher. In fact, in Greece it is three and a half times more.

All countries whose debts exceed the reference value should gradually reduce them. According to European rules, they have twenty years to do this. However, this was not imposed on the states, with the result that even before the coronavirus crisis, the national debt ratios in the five countries examined either remained very high or, as in France, they even continued to rise. During the pandemic, debt in all five countries received another “boost”.

Although Greece has the worst starting position in terms of numbers, IW economist Björn Kauder says the country “has good prospects in normal times”. Should the figures provided by the International Monetary Fund for 2026 be extended to 2041 (Scenario I), the debt-to-GDP ratio at the end of this time horizon will be 139%. Even if the growth of the four years before coronavirus (2016 to 2019) is valid for the years 2027 to 2041 (scenario II), there will be a reduction to 165% in twenty years. Only in the crisis scenario, which is based on the figures that were valid from 2012 to 2019, the debt ratio will increase further – up to 298%.

The first two scenarios look good for Portugal as well. “Both EU Member States have a remarkable primary balance,” Kauder writes. In Portugal, the economist sees good economic growth. Greece benefits from relatively low interest rates.

For France, Italy and Spain, Kauder expects debt ratios to rise further. At best, in France it will rise from 116% today to 134% in twenty years. In the worst case, the debt for Paris even reaches 156%. While France and Spain owe the debt mainly to weak primary balances, Italy is suffering from weak economic growth, according to the study. Summary: The sustainability of the national budget remains a political and economic challenge.