Introduction
In a recent two part series, I examined the arguments for greater stimulus or austerity in certain European countries and the US. I pointed out that EUR countries must adopt severe austerity programs because they have no choice: without their own currencies, they can’t “print money”. In the absence of outside assistance, these countries are totally dependent on their own revenues and what they can borrow. But desperate economic circumstances have prompted the EUR government in consort with the IMF to provide Greece and Spain (so far) with some financial assistance. This assistance is conditional on government deficit reduction over the next several years. The funds will be provided in tranches as the countries achieve certain deficit targets. The IMF is used to this sort of operation.
Just how serious will the austerity programs be for EUR countries and others? The IMF has started a series called the Fiscal Monitor. The latest issue, “Fiscal Exit: From Strategy to Implementation”, provides some interesting data on this question. It also looks out 20 years to see what countries will have to make the largest fiscal policy adjustments.
Financial Need
Table 1 provides data on the financial needs of a number of developed nations over the next two years. The table is notable because it includes maturing debt as well as new government debt. When a country gets in trouble, a government must find buyers for its maturing debt as well as its current government deficit. In fact, the Greek debt crisis came to a head over its failure to find new borrowers for its maturing debt. Even though the average maturity of the Japanese debt is greater than that of the US, it has a very large fraction of it coming due over the next two years. However, Japan sells most of its debt locally, and with its large international reserves, its financial position is not viewed as risky. The UK is perhaps situated better than any other country included in the table because its average debt maturity is 14 years compared to the US at about 5 years.
Table 1. – Financial Needs of Selected Countries, 2010-2011(Percent GDP)[1]
| 2010 | 2011 | |||||
| Total | Total | |||||
| Maturing | Budget | Financing | Maturing | Budget | Financing | |
| Country | Debt | Deficit | Need | Debt | Deficit | Need |
| Japan | 43.4 | 9.6 | 53.0 | 48.9 | 8.9 | 57.8 |
| US | 15.4 | 11.1 | 26.5 | 18.1 | 9.7 | 27.8 |
| Italy | 20.3 | 5.1 | 25.4 | 18.2 | 4.3 | 22.5 |
| Belgium | 17.8 | 4.8 | 22.6 | 18.4 | 5.1 | 23.5 |
| France | 14.3 | 8.0 | 22.3 | 16.0 | 6.0 | 22.0 |
| Spain | 10.8 | 9.3 | 20.1 | 11.0 | 6.9 | 17.9 |
| Portugal | 11.6 | 7.3 | 18.9 | 15.5 | 5.2 | 20.7 |
| Ireland | 6.5 | 11.9 | 18.4 | 6.1 | 11.8 | 17.9 |
| Greece | 10.3 | 7.9 | 18.2 | 16.5 | 7.3 | 23.8 |
| Canada | 13.1 | 4.9 | 18.0 | 13.3 | 2.9 | 16.2 |
| UK | 5.3 | 10.2 | 15.5 | 7.5 | 8.1 | 15.6 |
| Germany | 8.5 | 4.5 | 13.0 | 9.1 | 0.7 | 9.8 |
| Finland | 9.1 | 3.4 | 12.5 | 9.3 | 1.8 | 11.1 |
| Sweden | 4.1 | 2.2 | 6.3 | 4.5 | 1.4 | 5.9 |
Source: IMF Fiscal Monitor
Greece, Ireland, and Spain have been highlighted because of the financial crises they are currently facing. But for any country without its own currency, finding buyers for its maturing and new debt (current government deficit) is critical. Today, these three countries are in trouble. Tomorrow?
Ireland is notable for a number of reasons. Over the last two years, the Irish government has spent €30 billion propping up its banks. That is about 20% of its GDP! If the US did the same thing, TARP would have been nearly $3 trillion. So far Ireland has said it will take care of its own problems. We will see. Its financing needs in 2011 are only slightly less than in 2010.
As a brief aside, consider what the central banks of the UK and US have done, over the last two years. In 2009, the Fiscal Monitor estimated that Bank of England purchased 86.5% of the government’s net new issuance of debt. In the US, the Fed purchased 20.9%. Countries using the Euro don’t have their own central bank to buy up their debt.
Unemployment
It is interesting to consider the seriousness of the unemployment problems in those countries forced to accept “fiscal discipline”. Keynesians would view this as an issue. But even the IMF has some concerns. In another research paper, the IMF found that “a fiscal consolidation equivalent to 1% of GDP leads on average to a 0.5% decline in GDP after two years, and to an increase of 0.3 percentage points in the unemployment rate.”[2]
IMF unemployment projections are provided in Table 2, and they are worrisome.
Table 2. – Unemployment Rates, Selected Countries[3]
| Country | 2008 | 2009 | 2010 | 2011 |
| Spain | 11.3 | 18.0 | 19.4 | 18.7 |
| Ireland | 6.1 | 11.8 | 13.5 | 13.0 |
| Greece | 7.6 | 9.4 | 12.0 | 13.0 |
| Portugal | 7.6 | 9.5 | 11.0 | 10.3 |
| France | 7.9 | 9.4 | 10.0 | 9.9 |
| Finland | 6.4 | 8.3 | 9.8 | 9.6 |
| United States | 5.8 | 9.3 | 9.4 | 8.3 |
| Belgium | 7.0 | 8.0 | 9.3 | 9.4 |
| Italy | 6.8 | 7.8 | 8.7 | 8.6 |
| Germany | 7.2 | 7.4 | 8.6 | 9.3 |
| United Kingdom | 5.6 | 7.5 | 8.3 | 7.9 |
| Sweden | 6.2 | 8.5 | 8.2 | 7.7 |
| Japan | 4.0 | 5.1 | 5.1 | 4.9 |
| http://www.imf.org/external/pubs/ft/weo/2010/01/pdf/c2.pdf | ||||
Again, I have highlighted Greece, Ireland, and Spain. They are projected to have higher unemployment rates than any of other countries listed. These will be painful years. In all probability, there will be more “austerity “riots.
The Future of the Euro Community
The next few years will be tough. On the one hand, the Euro countries forced into austerity programs will really struggle. And German friends tell me they are not at all happy about having to bail out “their weak sisters”. However, there is a silver lining for Germany. Many people do not know that Germany competes with China to be the leading world exporter. And German exporters love a weak Euro.
[1] I have not been able to determine from the IMF whether these data reflect the austerity packages adopted by either Greece or Spain. [2] “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation”, Chapter 3 of the IMF’s October 2010 “World Economic Outlook” [3] I have not been able to determine from the IMF whether these rates allow for the unemployment increases likely to result from the austerity programs.