Public Debts: Sustainability at Any Cost?

Abstract

In the spring of 2014, the Irish government, and a few weeks later the Portuguese government, announced that their countries were pulling out of the financial assistance program and returning to financial markets for borrowing. Does this signal the end of a bleak episode in the short history of the Eurozone? Only Greece … Much as in the spring of 2010, at the start of the “sovereign debt crisis, it is tempting to focus on a scapegoat: the situation in the Eurozone’s public finances is on track, except for one outlier. But is it? The Stability and Growth Pact (SGP), which was suspended during the Great Recession, an “exceptional circumstance” if ever there was one, has been amended by a set of new enforcement rules, and is again ruling the public finances of the EU member states. The famous public debt criterion — the threshold at 60% of GDP — is back in force, national stability programs and the EU Commission’s recommendations to member states’ governments are now based on a scenario in which public gross indebtedness ratios are brought below the 60%-of-GDP threshold by 2032: the new set of fiscal rules adopted in the aftermath of the “sovereign debt crisis,” mandates national governments with debt ratios exceeding the threshold — all member states of the Eurozone except Finland and Luxemburg¹ — to reduce their debt ratio by 1/20 of the excess each year.

When the ratio of a Contracting Party’s general government debt to gross domestic product exceeds the 60 % reference value referred to in Article 1 of the Protocol (No 12) on the excessive deficit procedure, annexed to the European Union Treaties, that Contracting Party shall reduce it at an average rate of one twentieth per year as a benchmark, …

Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG, or Fiscal Compact, 2012)

Bearing in Mind that the need for governments to maintain sound and sustainable public finances and to prevent a general government deficit becoming excessive is of essential importance to safeguard the stability of the euro area as a whole, and accordingly, requires the introduction of specific rules, including a “balanced budget rule” and an automatic mechanism to take corrective action;

Article 4