Eurozone countries are facing “significant fiscal burdens” from ageing populations, extra defence spending and climate change, making it more urgent that they cut their high debt levels, the European Central Bank has warned.
Officials at the central bank estimate Eurozone countries have to reduce their budget deficits by an average of 5 percentage points of GDP, which would require savings or extra revenue of €720 billion at current output levels.
The ECB’s assessment of the budgetary challenges confronting the 20 members of the single currency bloc came as the European Commission reprimanded France and six other countries for breaching EU fiscal rules, increasing investor anxiety about the sustainability of public finances.
The debt levels of Eurozone countries are coming under the spotlight after they shot up due to higher Government spending aimed at shielding households and businesses from the coronavirus pandemic and the energy crisis triggered by Russia’s invasion of Ukraine.
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Investor anxiety has been heightened by the calling of a snap election in France, where the far-right Rassemblement National and a new left-wing alliance are leading in opinion polls. The parties have made lavish spending pledges, threatening a stand-off with both debt investors and Brussels.
The ECB said the pressure on public finances in the bloc would only increase in the coming years. It estimated that, to cope with the rising demands of ageing populations, climate change and higher defence spending by 2070, countries would require an average extra fiscal effort worth 3 per cent of GDP starting from this year.
This would come on top of the need to reduce debt levels back down to the EU limit of 60 per cent of GDP by 2070, which by itself the ECB said would require countries to “immediately and permanently” save an extra 2 per cent of GDP on average.
“These developments will be challenging enough in isolation, and countries will face all of them simultaneously,” the ECB said. “Consequently, action needs to be taken today – especially in high-debt countries facing elevated interest rates and the associated risks.”
There was a wide divergence between the scale of fiscal effort the ECB estimated countries would need to make to hit the 2070 target. Slovakia was estimated to need savings worth 10 per cent of GDP and Spain 8 per cent, while Estonia, Croatia, Greece and Cyprus would need to save less than 2 per cent of GDP.
“The necessary fiscal adjustment is large by historical standards, but not without precedent,” it said, pointing out that some countries, including Belgium, Ireland and Finland, ran primary budget surpluses, excluding interest payments, of more than 5 per cent of GDP for more than a decade in the 1990s and early 2000s.
The ECB warned the costs of tackling climate change could be much larger if global warming is not limited to 1.5C above pre-industrial levels. But it said there could be positive spillover effects from higher spending, structural reforms, digitisation and globalisation that were not captured by its models.
“There is no room for complacency, as the longer the adjustment is postponed, the larger the eventual adjustment cost will be,” it warned. – Copyright The Financial Times
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