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Krugman Vindicated?: Eurozone Debt Apparently Falling

Summary:
To be precise: the Eurozone’s (and the wider EU’s) debt-to-GDP is apparently declining, falling 0.5 points to 92.2% between the first and second quarters of this year. Apparently this was thanks to growth in Ireland, the Netherlands, Portugal, Belgium, and especially Germany. But I don’t quite understand how this is possible given that Eurozone growth on average is still very low, almost certainly too low to make up for continuing deficits. Eurozone GDP grew by 0.5% in first quarter of 2015 (annualized 2%?), while the most recent deficit figures for 2014 show the Eurozone with a 2.6% public deficit (lower than the 3% deficit rule, but that’s mostly because Germany has a small surplus). With my little calculator here, I find that 2% growth would have reduced debt-to-GDP of 92.7% by 1.8 points. Which is quite a bit lower than the Eurozone’s 2.6% deficit in 2014. So, unless there was a big decline in the deficit, in the first quarter of 2015, you would think debt-to-GDP would still be increasing or stagnant, not dropping by 0.5 points. So I do not know what is going on. Perhaps the deficit really went down a lot in Q1 2015. Quarter-on-quarter Eurostat data also can have weird glitches. For example, Poland once had a big drop in debt-to-GDP because of an accounting move which shifted pensions from a public to a private plan.

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Krugman Vindicated?: Eurozone Debt Apparently Falling

To be precise: the Eurozone’s (and the wider EU’s) debt-to-GDP is apparently declining, falling 0.5 points to 92.2% between the first and second quarters of this year. Apparently this was thanks to growth in Ireland, the Netherlands, Portugal, Belgium, and especially Germany.

But I don’t quite understand how this is possible given that Eurozone growth on average is still very low, almost certainly too low to make up for continuing deficits.

Eurozone GDP grew by 0.5% in first quarter of 2015 (annualized 2%?), while the most recent deficit figures for 2014 show the Eurozone with a 2.6% public deficit (lower than the 3% deficit rule, but that’s mostly because Germany has a small surplus).

With my little calculator here, I find that 2% growth would have reduced debt-to-GDP of 92.7% by 1.8 points. Which is quite a bit lower than the Eurozone’s 2.6% deficit in 2014. So, unless there was a big decline in the deficit, in the first quarter of 2015, you would think debt-to-GDP would still be increasing or stagnant, not dropping by 0.5 points.

So I do not know what is going on. Perhaps the deficit really went down a lot in Q1 2015. Quarter-on-quarter Eurostat data also can have weird glitches. For example, Poland once had a big drop in debt-to-GDP because of an accounting move which shifted pensions from a public to a private plan. There is no reason to think national statistical reporting is perfectly consistent, especially on the very granular quarter-to-quarter basis.

Or, maybe those Keynesians were right all along and “austerity” really is as self-defeating as they say. Since about 2013, the European Commission has generally allowed national governments to focus on the “structural deficit,” slowly reducing the deficit through growth rather than austerity (France in particular has benefited from repeated postponing of deficit-reduction deadlines). What’s more, the European Central Bank has been buying up lots of public bonds and is doing a kind of “quantitative easing,” which is making government refinancing cheaper and giving investors confidence that Euroland and its financial system aren’t going to collapse due to serial public defaults or an umpteenth financial panic.

So Eurozone elites, as opposed to any democratic body, have shifted policies towards a watered-down version of what Paul Krugman has been advocating for years. And maybe it’s working… Very, very slowly. In the meantime, those GIIPS NEETs can always find jobs in London/Berlin or stay in their mom’s basement. It will all work out as long you don’t vote for ineffectual euro-lefties who promise you both le beurre (leftism) and l’argent du beurre (the euro). (We’re looking at you: Portugal.) If you want your elections to determine your own policies, well, you need your own government. In that sense Marine Le Pen and Guy Verhofstadt have coherent positions, whereas Alexis Tsipras and François Hollande do not.

Or maybe these quarterly figures aren’t so significant and the Eurozone will still end up stuck in debt slavery as workforces inexhorably shrink due to demographic aging. Hard to say.

Maybe a Eurostat expert can enlighten me.

Craig Willy
This is the blog of European affairs writer Craig James Willy. Elite and popular discourse on the European Union tends to have a weak relationship with reality. Both pundits and politicians – whether American liberals or conservatives, British eurosceptics or simply French – tend to project their national dreams and nightmares upon it. I have a nuanced analysis of Europe based on the primacy and diversity of national realities and on actual EU decision-making practices.

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