Public Debt of the Euro Area Is Close to Its Gross Domestic Product
Although the coronavirus crisis is slowly subsiding in the EU, it has caused a massive outflow in the public finance of individual Member States. While the total government debt-to-GDP ratio was continuously decreasing in previous years until the end of 2019, since the first quarter of last year, the trend has changed dramatically, Goldenburg Group comments data published by EC and ECB.
The euro area closed 2019 with the government debt-to-GDP ratio of 84 percent. At the end of the first half of last year, it rose by 11 percentage points and by the end of the third quarter, it increased further by more than two percentage points. During the last 3 financial quarters of the last year, when the coronavirus pandemic has been prevalent, the government debt of the euro area increased by 13.3 percentage points. It is an unparalleled growth in the history of the European Economic and Monetary Union.*
The largest increase in the government debt was faced by the countries of the so-called South wing of the euro area, such as Italy, Spain, Greece, Portugal and Cyprus. In all of these states, the government debt has already exceeded the level of 100 percent of GDP and keeps growing. For example, Italy reported a debt-to-GDP ratio of 154.2 percent at the end of the third quarter of last year. Greece, which has gone through a tough debt therapy in previous years and entered the coronavirus crisis with a debt of about 180 percent of GDP, has already exceeded double its annual economic output in this indicator.*
Maastricht criteria are met by only few countries
The growth of government debt in the countries that were yet recently regarded financially austere may be considered alarming to a certain extent. For example, Austria and Germany have been close to 80 and 70 percent, respectively.*
On the other hand, the euro area still has several countries able to meet the Maastricht criterion of government debt (60 percent of GDP). They include the Baltics, Ireland (which has already been on the edge), Malta, the Netherlands and Slovakia.*
The increase in the government debt of individual euro area countries is understandable to some degree and definitely not exceptional in the context of other countries in the world. It was a response to the impacts of the coronavirus pandemic aimed at maintaining the aggregate demand and preventing an immense slump that had threatened to the world economy.
Quantitative easing results in the accumulation of bank deposits with the ECB
A massive response from the European Central Bank has come hand in hand with the fiscal policy of individual governments. The ECB has expanded its quantitative easing programme, which was re-launched in 2019 after the euro area inflation had long been deep below the target level of two percent.**
As a result, the balance sheet total of the European Central Bank amounted to almost EUR 7 trillion last year. It is about a 50-percent increase compared with the end of 2019. On the asset side, the largest growth was seen in long-term refinancing operations and securities held for monetary policy purposes, which increased by nearly EUR 1.2 trillion and EUR 1 trillion, respectively.**
The change in these two items on the liability side of the ECB balance sheet is largely reflected in bank deposits with the ECB, which report additions of about EUR 1.7 trillion. This means that although the European Central Bank purchases government and other securities in order to put money into circulation and thus support demand, most of it returns to the ECB in the form of commercial bank deposits.
Tony Christoforou General Manager Goldenburg Group Ltd.
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Disclaimer: The content of the Reports constitutes Marketing Communication and does not constitute Investment Advice or Investment Research or an offer for any transactions in financial instrument. The content of the Reports represents the view of our experts on a generic basis, and does not take into consideration individual readers personal circumstances, investment experience or current financial situation. In addition, the Reports have not been prepared in accordance with legal requirements designed to promote the independence of Investment Research, and are not subject to any prohibition on dealing ahead of the dissemination of Investment Research. Readers using the Reports should consider the possibility of encountering substantial losses. The past performance is not a guarantee of future results. Therefore, Goldenburg Group Limited shall not accept any responsibility for any losses of traders due to the use and the content of its Reports.