Eurozone governments, unable to implement coherent medium-term fiscal plans, are facing pressure on their credit rating, even though it is possible to reduce public borrowing, including in heavily indebted countries.
“We are concerned about highly indebted countries with large primary deficits and governments operating in highly fragmented political environments and struggling to implement reforms,” said Alvise Lennkh-Yunus, head of Scope Ratings.
Formerly crisis-hit countries, such as Greece, Ireland, Portugal, Spain and Cyprus, have implemented significant reforms within the framework of EU financial assistance programs, resulting in a more favorable macroeconomic trajectory. However, not all countries used recent years of loose monetary policy equally effectively to deal with the fiscal challenges that followed.
France and Belgium, two countries that Scope assesses with a negative outlook, are at risk of not fully recognizing their economic limitations. Government plans, aimed only at stabilizing public debt at today’s elevated ratios, suggest that debt will continue to rise whenever a new crisis occurs.
The recent pending revision of France’s budget deficit to 5.5% of GDP for 2023 further casts doubt on the government’s austerity plan, which, according to the country’s audit conference, may now require additional savings of around 50 billion euros. euros or 2% of GDP, in the coming years in view of the 2027 presidential elections.
At the same time, in the absence of changes in Belgian policy after the federal and regional elections in June, Scope expects the country to record the largest budget deficit in Europe, exceeding 5% of GDP in the coming years. This will lead to a steadily increasing debt trajectory and the third highest level of public debt in Europe by 2028, after Greece and Italy.
“The challenging context for euro area governments stems from three challenges: moderate growth, high public debt and rising interest payments, coinciding with pressures for higher spending and investment, which are mainly earmarked for the elderly, the environment and defence,” Lennkh-Yunus reports.
Combined, these trends will strain fiscal budgets by around 3%-4% of GDP on average over the coming years. This includes significant investment needs to make states climate neutral by 2050, accounting for around 0.5% to 1% of GDP annually for the public sector alone, according to European Commission figures.
Public debt is higher overall and fiscal disparities between eurozone states have widened since the crises. The debt ratio gap between Germany and France rose from 38 percentage points in 2019 to almost 50 percentage points, in contrast to the almost zero difference between 1992 (when the Maastricht Treaty was signed) and 2012, at the height of the eurozone crisis.
“Different levels of public debt imply different capacities to deal with the next shock. Such divergent fiscal stances can complicate discussions about future solidarity and fiscal risk sharing, especially in case of country-specific rather than region-wide shocks,” notes Lennkh-Yunus.
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