Eurozone deficit and debt data - Ernst & Young - Ireland

Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast (EEF), comments on Eurozone deficit and debt data

• 2010 deficit data provide a stark reminder of the steep road ahead.
• The latest revision to the Portuguese deficit numbers undermine credibility of public finances data. This implies higher risk premia and will take a long time to repair.
• Last year was a year of announcements. 2011 is the year when fiscal austerity starts being implemented in earnest.
• Today's data also highlight the tight links between the public and financial sector. Large contingent liabilities imply that a worsening of the situation in the banking sector would imply significant costs to the public purse. 

"Today's data on 2010 public debt and deficits in the Eurozone provide a stark reminder of the steep road ahead. At the Eurozone level, the deficit was twice the Maastricht threshold last year, at 6% of GDP. This was only slightly less than in 2009 and these two years recorded the largest deficits since at least 1970. The small dent in the deficit last year was far from sufficient to rein in debt that increased to more than 85% of GDP." 
 
"But the main concerns are not about the Eurozone aggregate results which are less bad than, for instance, the equivalent US ratios. Concerns focus on a few countries instead. In particular, today's release includes the latest upward revision to the Portuguese deficit data. While we were initially told that the government had met its objective of bringing the deficit down to 7.3% of GDP, two waves of revisions later we now learn that the deficit was much larger at 9.1% of GDP last year. These revisions are bad news in two respects. First, they imply that the task to bring the deficit down is much larger than initially envisaged. Second, they undermine the credibility of data on public finances in Portugal in particular and in peripheral countries in general. Low credibility implies higher risk premia which makes the risk of restructuring higher. Peripheral countries need to convince markets and analysts that the numbers in their austerity plans add up. This will take a long time." 
 
"While last year was a year of announcements, fiscal austerity starts in earnest this year. Fiscal austerity is one main factor behind our forecast of subdued growth in the Eurozone. We know that it will hit growth in peripheral countries hardest and we forecast falling or, at best, stagnant GDP in these countries. But even outside the periphery, some countries need quite a drastic tightening of public finances. France and Slovakia are worst placed with deficits at 7% and 7.9% of GDP last year. Announcements so far have fallen short of a convincing plan to bring the deficits and hence debt back under control. By contrast, Germany with a deficit at only 3.3% of GDP has some room to proceed with only a moderate tightening. But the government looks set on restoring fiscal balance as soon as possible."
 
"Today's data also highlight the tight links between the public and financial sector. Large contingent liabilities, worth 6.5% of GDP, imply that a worsening of the situation in the banking sector would imply significant costs to the public purse. One can imagine a vicious circle whereby a worsening in public finances has a negative impact on banks' balance sheets which requires government bailout of some institutions which in turn worsens public finances further."