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Authorial text of Marija Radenović, Spokesperson of the Ministry of Finance – “Europe and Public Debt Crisis“ published in the Daily “Vijesti

Authorial text of Marija Radenović, Spokesperson of the Ministry of Finance – “Europe and Public Debt Crisis“ published in the Daily “Vijesti
Published date: 15.09.2011 11:25 | Author: Ivona Mihajlović

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Authorial text of Marija Radenović, Spokesperson of the Ministry of Finance, – “Europe and Public Debt Crisis“ published in column “Forum“ in the Daily “Vijesti, 13th August 2011

In addition to currency and banking crisis, the most developed European countries are now confronted with public debt crisis. Out from 17 euro zone countries, 12 are recording debt surpassing prescribed ceiling of 60% of GDP. Greece is the EU country with the highest debt amounting to 142% of GDP, Italy with 119% of GDP, followed by Belgium and Ireland with 96%, Portugal with 93%, Germany with 83%, etc.

Data indicating constant increase in the national debt are alarming. As of the end of 2010, the debt in the euro zone countries amounted at 85.1% of GDP, which means that it increased by 16 percentage points from 2008, being 25 percentage points above the set limit.

Increased public debt has a number of negative implications to the national economies. Primarily, it increases the cost of debt servicing, thus directly reducing the amount of available funds for financing other needs. Furthermore, the increased debt is generating the growth in interest rates, which adversely affects the investment and the economic growth in general, reducing the possibility of fiscal adjustments in the event of new shocks.

In addition to the high public debt problem, many European countries are exposed to even greater fiscal risk, because their population is rapidly aging, additionally burdening public finances dictating higher health insurance and pensions costs.

“Maplecroft” company professionalized in analysis and classification, has marked a number of European countries (Italy, France, Belgium, Sweden, Hungary, Germany, Denmark, Austria, Great Britain, Finland, Greece) as “extremely risky ones”, featured by the aging population and high social care costs. And the IMF is warning that the fiscal implications of the aging population could overshadow the financial crisis effect, since the aging, in addition to creating the pressure on public finances, is reducing the ability of population to increase productivity, subsequently decreasing the rate of long - term economic growth. Therefore, it is obvious that the aging problem can be translated into the public debt sustainability issue.

The public debt is a category equally determined by both the past and the future: past, because its amount is determined as a cumulative of the previous deficits, and future, because its sustainability depends on the future ability of a government to service debt, which further on depends on a number of economic and political factors.

Without radical cuts, in the form of decreasing consumption or taxes increase, the solution for the countries that are in the debt crisis is not even in horizons. In both cases, it encompasses politically unpopular measures, the implementation of which envisages difficult decisions, being deemed necessary to achieve macroeconomic stability and to ensure economic growth. These changes in some countries, like Germany and France, have already commenced, through the increase in the retirement age limit and the amendments to the social insurance system, in order to avoid pre - retirement, and to tailor unemployment benefits in a manner to encourage return to work. France has increased the minimum age limit from 60 to 62 years, while the age limit for a full pension has been increased from 65 to 67 years.

Furthermore, these countries are considering the introduction of new taxes and increase in the current ones, with the objective of leveraging the debt to a sustainable level, introduction of sharp cuts in public consumption and privatization of state enterprises. The introduction of these measures is confronted with the protest from citizens, threatening the escalation of social unrest and riots, creating new difficulties to countries. On the other hand, the EC is neither satisfied with the plan nor with the developments of reforms implemented by the powerful EU states. The EC has warned the EU members that that their reforms plans are too modest and less ambitious. “It is essential to send a signal unambiguously showing that the public debt crisis in the euro zone will be resolved and that all measures dictated by weight of the situation will be undertaken”, said that European Commission President Jose Manuel Barroso, addressing the leaders of euro zone countries.

The question whether the leaders of the most powerful EU countries will be strong enough to undertake severe cuts and whether a political consensus will be achieved for undertaking of “all measures laid down by the weight of the situation” remains to be seen. Otherwise, Europe may expect new shocks.