By: Dr. Mike Campbell
In order to “ensure” that the single European currency adventure would work, countries wishing to join the Euro had to ensure that their economies were broadly aligned before entry. One of the conditions that aspirants had to meet was that their budget deficits had to be at, or below, 3% of their respective Gross Domestic Product (GDP). Whilst Greece fudged the issue, and thereby eroding investor confidence when the tsunami of the global financial crisis engulfed them, the other members of the club met the criterion.
Even Germany was unable to keep its deficit below the 3% benchmark in the wake of the global financial crisis. Nations around the world pumped money into their economies in an attempt to stimulate them and ward off the worst effects of the crisis - the money had to be found from somewhere and consequently budget deficits were enlarged. As a consequence of the global financial crisis, money supply was choked off and the question of national debts and deficits took centre-stage, ultimately leading to the European sovereign debt crisis which ultimately led to Greece, Ireland and Portugal requiring EU/IMF bailouts to ensure that they could meet their obligations after market borrowing rates became prohibitively expensive.
The only way forward to restore some confidence within the investor community, thereby allowing borrowing to continue, was to cut the deficits and this required draconian austerity measures in many countries. According to Eurostat, these measures are now bearing fruit with the average Eurozone deficit falling from 6.2% last year to 4.1% this. Germany’s deficit fell from 4.3 to 1% of GDP; Ireland 31.2 to 13.1%; Greece 10.3 to 9.1 and Spain 9.3 to 8.5%. However, the total level of debt within the zone increased from 85.3 to 87.2% of the bloc’s GDP. Much work remains to be done to get the deficits back within convergence criteria, but the obvious elephant in the room remains public debt.