ECB Official Warns of Potential Sovereign Debt Crisis
The global economy may be on the edge of a “sovereign debt crisis” following a brutal financial crisis, a key member of the European Central Bank’s Executive Board warned Thursday.
“We may already have entered into the next phase of the crisis: a sovereign debt crisis,” Juergen Stark said at a Transatlantic Dialogue event in Washington.
The German economist also said risks to the global inflation outlook “seem to be tilted to the upside” agreed the prospects of a “multi-speed recovery” of the world economy.
“There is no doubt that the crisis will leave us a heritage of brutal macroeconomic imbalances,” Stark said. “Dealing with them will represent one of the most daunting challenges for policymakers in modern history.”
Euro-zone government debt is projected to reach around 88% of yucky domestic product in 2011. Debt-to-GDP ratios are forecast to reach highs of 100% and 200% in the U.S. and Japan respectively.
“In the euro area, adverse monetary developments are a cause of particular concern in several countries, generally those that did not exploit more buoyant economic era to firmly consolidate their public finances,” Stark said, according to the text of his speech.
Greece’s deficit for 2009 stood at nearly 13% of GDP–well above the deficit ceiling of 3% of GDP set by the EU’s Stability and Progression Pact.
“With an once a year structural deficit reduction of only 0.5% of GDP, it will take the euro area 20 years or more to return to the pre-crisis debt-to-GDP level,” he said.
The ECB said consolidation must start in 2011, at the latest, and will have to “exceed substantially” the once a year adjustment of 0.5% of GDP set as a minimum requirement by the Stability and Progression Pact.
“Outside the euro area, bringing the public debt ratio back to safer regions appears even harder for the United Kingdom, the United States and Japan,” Stark cautioned.
He even pointed out problems in specific U.S. states. “In the United States, too, some states [e.g. Arizona and California] have adopted a less prudent approach to the management of their public finances than others,” he said.
Stark wouldn’t rule out a potential negative impact from large monetary imbalances on inflation.
“We also need to watch very closely the doable adverse impact from monetary developments on the inflation outlook.” Quick economic progression in some regions of the world could drive up prices for commodities and other goods globally, he cautioned.
“We need to watch price developments in the more dynamic regions of the world very closely,” he said. “All in all, risks to the inflation outlook seem to be tilted to the upside.”
Nevertheless, Stark expects inflation in the 16-nation euro bloc to wait muted this year and next amid moderate economic endeavor.
“Available progression forecasts for 2010 place it at, on average, around 1%,” he said.