Greece, the EU, deficits and debt

(BRUSSELS) - Greece, in the eye of a storm over its public finances, is just one of several European countries with high budget deficits: 20 of the 27 countries in the European Union are the targets of excessive deficit procedures by the European Commission here.

Many of these countries had deficit problems even before the global economic crisis and these have suddenly become far more severe owing to the cost of programmes to stimulate economies away from recession and to rescue banks.

Of the 27 countries, seven are not in trouble with the Commission, which is charged with policing respect for the rules.

They are Finland, Luxembourg, Cyprus, Denmark, Sweden, Estonia and Bulgaria. Of these, only the first three are members of the 16-nation eurozone.

The Stabilty and Growth Pact requires that each country hold down its annual public deficit to a maximum of 3.0 percent of gross domestic product.

EU rules also require that the national debt, of accumulated past deficits, should not exceed 60 percent of output and if so must fall structurally to within this limit.

The original purpose of the pact was to ensure that once countries had qualified to join the eurozoe, they then moved into public surplus during years of growth, so that a surplus plus 3.0 percent of deficit could be used as a cushion against severe downturn.

The pact was promoted by the then German finance minister Theo Waigel, after the Maastricht Treaty had been signed and in the run-up to the launch of the euro, to ensure ever greater convergence and avert the kind of problem that has now occurred in Greece and is casting a shadow over Portugal and Spain.

Germany had wanted clear-cut, hard and fast automatic penalties for any country that breached the rules but had to accept a compromise heavily qualified by conditions and procedures.

The public deficit covers the annual gap between revenues and expenditure on budgets for central government, welfare programmes and local authorities. The public debt likewise covers the accumulated total of past annual deficits on these budgets.

Governments fund deficits by issuing bonds, or loan instruments, to borrow money from savers at home and abroad in return for an interest rate, or yield, fixed to be attractive at issue. Such instruments have a life of up to 15 years or even longer.

An additional factor is therefore the capacity of a country to maintain interest payments on past debt, to finance the interest rate necessary on new debt that may well be rising and to find money to redeem debt falling due.

The relative burden of debt, and the capacity to finance it, are also affected by inflation and by the growth an economy can achieve.

Some of the most prominent examples of deficit and debt in the eurozone, as given in economic forecasts by the Commission in October, are:

GREECE: The country faces the worst crisis for 30 years. The deficit is expected to be 12.7 percent of GDP in 2009 and the debt 113 percent.

The Commission expects a deficit of 12.2 percent and debt of 124.9 percent in 2010. Greece now intends to cut the deficit to less than 3.0 percent in 2012.

SPAIN: The deficit is estimated at 11.2 percent of GDP and the debt at 54.3 percent in 2009. In 2010, the deficit is put at 10.1 percent and debt at 66.3 percent.

PORTUGAL: Estimated deficit of 8.0 percent of GDP and debt of 77.4 percent in 2009, and a deficit of 8.0 percent and debt of 84.6 percent in 2010.

The Portuguese government puts its deficit at 9.3 percent last year. It has undertaken to reduce it to 8.3 percent this year and to 3.0 percent in 2013. It puts the debt at 76.6 percent last year and sees it rising to 85.4 percent in 2010.

IRELAND: The estimated deficit last year is 12.5 percent of GDP and debt 65.8 percent, and the Commission expects the deficit to be 14.7 percent this year and the debt 82.9 percent.

ITALY: The deficit for 2009 is estimated at 5.3 percent of GDP and the debt at 114.6 percent. The Commission estimated that the deficit this year will be 5.3 percent and the debt 116.7 percent.

FRANCE: The estimated deficit for 2009 is 8.3 percent of GDP and the debt 76.1 percent. The Commission puts the deficit this year at 8.2 percent and the debt at 82.5 percent.

GERMANY: The deficit for 2009 is estimated at 3.4 percent and the debt at 73.1 percent of GDP. For this year, the Commission expects the deficit to be 5.0 percent and the debt 76.7 percent.