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Government spending varies across EU and Eurozone

April 26, 2011

EUROSTAT released its first data on the total government debt and deficit from 2010 for the 27 member states of the European Union today.  Overall, the government deficits were 6.4 percent of GDP for the entire region, while the deficits of the 17 countries that use the euro were 6.0 percent.[1]  In addition, the levels of government debt are also high, as it is now equivalent to 80 percent of GDP for the entire EU and 85.1 percent for the Eurozone.

As Figure 1 shows, all but two countries in the EU ran deficits in 2010—Sweden had a balanced budget and Estonia ran a 0.1 percent surplus.  In addition, to the naked eye, the countries that use the euro (blue) and those that do not (red) appear to have fairly similar spreads among the size of their deficits, with a few notable exceptions.  Comparing the standard deviations of the two groups gives a more nuanced view of “are the deficits of the Eurozone greater than those of the non-Eurozone countries.”  The standard deviation of the 11 countries who did not use the euro in 2010 was 3.27 percent of GDP, while that of the 16 countries that used the euro were 7.15 percent.  Of course, Ireland is clearly skewing this data, and removing the Emerald Isle produces a new standard deviation of 2.6 percent, which is actually lower.  This means that the deficits of the Eurozone governments are actually clumped more closely together than those not using the euro (excluding Ireland of course).

Figure 2 shows the bigger threat to the euro in the long term—total government debt.  Here Greece’s problems are revealed, as its debt is already more than 140 percent of GDP—i.e. the government owes more than the entire annual output of its economy.  Italy also has the distinction of having a debt greater than 100 percent of GDP, which helps explain why it is often lumped into the “PIIGS,” even though its 2010 deficit was relatively small.  In addition, for once communism actually had some beneficial effects on many of the new members.  While the average national debt of a member state is 61 percent,[2] the average government debt of the ten post-communist countries is 39 percent.  This low number is the result of some countries not inheriting any debt when they became independent (such as the Baltic countries) or disastrous communist government policies to eliminate debts (for instance, Romania paid off its debts just months before the Ceausescu regime fell in 1989).

One of the biggest arguments on the structural weakness of the euro is that some countries continually have loser fiscal policies than others in the Eurozone.  Not only are 12 of the 16 euro area countries in breach of the requirement that their debts remain below 60 percent of GDP, but the range of debt is huge—from Greece’s 143 percent to Luxembourg’s 18 percent.  As a result, the standard deviation is 31.56% for the Eurozone (it is actually higher at 32.08% if Ireland is excluded), while that of the 10 non-Eurozone countries is 23.1%.  As a result, it is not surprising that the Eurozone might not be the optimal currency area as predicted before the adaptation of the Euro.

[1] EUROSTAT considered Estonia part of the Eurozone, even thought it did not officially join the group until January 1, 2011.  Due to the small size of Estonia’s economy, this distinction is not very important, as Estonia actually ran a surplus of 0.1% of GDP and its debt is only 6.6% of GDP.

[2] The discrepancy between this number and the 80 percent cited by EUROSTAT is that EUROSTAT used the aggregate debt and EU economy, while 61 is a country’s average.

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