Euro Zone Government Debt Could Top 100% of GDP
Government debt in the euro zone may top 100% of yucky domestic product in the next few years, and high public-sector borrowing could have “brutal consequences” for progression and stability, a key member of the European Central Bank Executive Board warned.
“The euro-area government debt-to-GDP ratio could increase to 100% in the next years–and in some euro-area countries well above that level–if governments do not take strong corrective action,” Juergen Stark said in a research article published Wednesday.
The region’s debt in 2008 stood at nearly 70% of GDP, and the ratio could surge to around 88% in 2011, ECB staff projected.
“These monetary developments are all the more worrying in view of the projected ageing-related spending increases, which constitute a medium to long-term monetary burden,” Stark wrote in the preface of an ECB Occasional Paper on monetary policies.
He reiterated that governments in the 16-nation euro bloc must pursue rigorous monetary consolidation to restore people’s entrust in public finances.
“A continuation of high public-sector borrowing without the credible prospect of a return to sustainable public finances could have brutal consequences for long-term interest rates, for economic progression, for the stability of the euro area and, therefore, not smallest amount for the monetary plot of the European Central Bank,” Stark said.
In an effort to support the struggling banking sector, governments have assumed significant monetary risks and ECB researchers warned that this could threaten monetary solvency in the medium-to-long-term.
“The major sources of monetary risks are doable further capital injections, guarantees to the banking sector which may be called and the increase in the size of governments’ balance sheets,” ECB economist Maria Grazia Attinasi said. “The risk of the government debt ratio rising further cannot be ruled out.”
The choice by governments to support the banking sector has also affected investors’ perception of countries’ creditworthiness.
Attinisi said: “Augmented risk aversion toward governments may reduce investors’ willingness to provide long-term funding to sovereign borrowers.”
“This would adversely affect governments’ capacity to issue long-term debt and may impair the sustainability of public finances by way of higher debt servicing costs,” she added.