PUBLIC DEBT DYNAMICS IN THE EU

Andrea Montanino

European Commission

Directorate General Economic and Financial Affairs, Public Finances with particular reference to the euro zone

EU FISCAL RULES IN BRIEF

Deficit ceiling 3% of GDP Maastricht Treaty

What? How much? Where?

Debt ceiling/target

60% of GDP Maastricht Treaty

Deficit target Close to balance

Stability and Growth Pact

DEBT DYNAMIC IN EUGeneral government consolidated gross debt - Excessive deficit procedure (based on ESA 1995)

30

35

40

45

50

55

60

65

70

75

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Per

cen

tag

e o

f g

ross

do

mes

tic

pro

du

ct a

t m

arke

t p

rice

s

60

70

80

90

100

110

120

130

DE

FR

EU-15

IT

(Right axis)

IS DEBT CRITERION STRINGENT ENOUGH?

,

SFbπyisb

SFbπyisb b

0

%ibsd 3

ifss dc

bc

b

SF

by

%3)(

[1]

[2]

[3]

[4]

THE IMPACT OF STOCK-FLOWS OPERATIONS

Cumulative stock-flow operations in EU countries (1997-2003)

-5,0

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

BE DK DE EL ES FR IE IT NL AT PT FI SE UK EU-15

% GDP

Source: European Commission AMECO database

ENSURE DEBT REDUCTION

b

b

b

SF

by

%3

[5]

[6]

WHY REDUCING DEBT NOW IS IMPORTANT: THE ISSUE OF LONG

TERM SUSTAINABILITY OF PUBLIC FINANCES

Deficit

GDP nominal growth

rate

Long term debt to

GDP ratio

Maastricht 3.0% 5.0% 60.0%SGP 0.0% 0.0%Maastricht and a more realistic growth scenario

3.0% 3.5% 85.7%

"realistic" SGP and "realistic" growth 0.5% 3.5% 14.3%

THE SGP AND THE REPAYING OF THE DEBT

Years necessary to reach a debt toGDP ratio around 15%

Debt/GDPin 2006

CTB and currentreal growth

Deficit andgrowth as last 5

yearsBE 94 98 55DK 26 39 4DE 58 EL 88 43 ES 47 38 FR 57 67 IE 35 12 4IT 89 105 LU 3 0 0NL 45 56 19AT 61 92 PT 53 55 FI 41 36 5SE 18 12 1UK 39 39 14EUR-12 63 74 EU-15 59 68

SUSTAINABILITY INDICATORS

• Extrapolation of debt levels up to 2050 based:– targets for budget balance in 2007 as set down

in stability and convergence programmes– constant tax burden and non-age related

primary expenditures at 2007 level – projected increase in age-related spending

based on Economic Policy Committe or national projections

AGE-RELATED EXPENDITURE PROJECTIONS IN EU COUNTRIES

2000 2005 2010 2020 2030 2040 2050 changeBE 23,9 22,5 22,9 24,1 27,0 27,9 27,5 3,7DK 28,5 29,1 31,0 32,7 34,3 34,7 33,9 5,4DE 24,0 23,7 23,4 24,9 28,4 29,9 30,2 6,1EL 21,8 21,1 21,1 24,0 28,8 33,5 34,8 13,0ES 21,3 19,3 19,1 20,2 23,0 26,9 28,7 7,4FR 26,5 26,3 26,9 29,3 30,6 30,6 30,5 4,0IE 10,1 9,6 9,7 11,2 11,9 12,2 13,2 3,1IT 24,2 24,4 24,5 25,5 26,6 27,1 25,8 1,6LU 7,6 7,4 7,9 8,6 9,5 9,8 9,5 1,9NL 21,4 21,8 23,1 25,5 28,3 30,4 30,3 8,9AT 26,9 27,1 27,4 28,5 31,3 32,1 31,1 4,2PT 21,5 22,0 23,0 24,6 24,9 25,5 25,1 3,5FI 25,3 24,8 25,5 27,1 30,2 32,0 31,8 6,5SE 27,0 26,8 27,2 27,8 30,0 31,0 30,6 3,6UK 17,4 17,5 17,3 17,0 18,0 17,3 18,0 0,6

Source: Economic policy Committee (2003): it includes pensions, health care, education and unemployment benefits

AN AGGREGATE PICTURE

20

40

60

80

100

120

140

160

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

EU - non compliance SCPs 2003 EU baseline

debt/GDP

Source: Commission Services

60% reference value

TO SUM UP Rational for EU fiscal rules and in particular for the Stability

and Growth Pact can be found in long term challenges.

Long term sustainability is not ensured in EU countries and the risk of repaying the debt is more theoretical than real. The 3% ceiling is not sufficient to ensure sustaianbility in the long term

Debt raises concern:

It is increasing in some countries

It does not reduce at a satisfactory pace in some of the high debt countries

More focus on debt and long term sustainability is needed in the EU framework

USEFUL REFERENCESPublic Finances in EMU – 2003

http://europa.eu.int/comm/economy_finance/publications/publicfinance_en.htm

Economic Policy Commitee long term projections and methodological references

http://europa.eu.int/comm/economy_finance/epc/epc_ageing_en.htm

National Stability and Convergence Programmes and Commission assessements

http://europa.eu.int/comm/economy_finance/about/activities/sgp/year/year20032004_en.htm