In the latest Fiscal Sustainability Report, Brussels, which is expecting the European Union as a whole to reduce their public debt from 81 percent to 72 percent of GDP within the next decade, has warned how this could be unsustainable in the medium term for seven countries. The new report highlights the high risk of chronic debt particularly in Belgium, Spain, France, Italy, Hungary, Portugal and the UK. It analyses the fiscal viability of the EU member states in the short, medium and long term.
The report maintains that while Cyprus’ economic crash in 2018 is still a concern, there are ongoing problems in four other countries: Spain, France, Italy and Hungary.
The Commission warns “high or rising levels” of debt of these countries are “important sources of vulnerability”.
In the case Spain, the Commission is forecasting a deterioration in its economy in the short-term over the next two years, with a deficit of one percent of GDP.
This has sent alarm bells ringing through Brussels around the prospects of the bloc’s sixth biggest economy, valued at £1.1trillion.
Brussels is estimating without major changes in fiscal policy, Spanish debt could rise to 107 percent of GDP in 2029 because of the costs from an ageing population and interest rates above the rate of increase.
The context outlined by Brussels follows an annual GDP expansion of 1.2 percent and inflation of 1.9 percent over the next 10 years.
But if Spain closed in 2029 with an annual primary surplus of 1.8 percent, this would lower to 76.7 percent and if this was even lower at 1.1 percent, the debt would be lower than the threshold of 90 percent that would allow Spain to exit potential risk.
The report says: “Over the medium term, fiscal sustainability risks appear to be high for Spain.
“The still high and increasing debt to GDP ratio at the end if projections in the baseline scenario, and the sensitivity to possible macro-fiscal shocks contribute to this assessment.
“Over the long term, Spain is deemed at high fiscal sustainability risk. The substantial sustainability gap indicator to stabilise debt over the long-term combined with vulnerabilities from the high debt burden reflected in the DSA risk assessment contribute to this assessment.”
The Sentix Economic Index, which surveyed 1,004 investors between January 31 and February 2, fell from -1.5 points last month to -3.7 during the current period. This is the lowest since November 2014 and the sixth successive month of decline, with the Index having being as high as +12 in September.
The Ifo Economic Climate report for financial experts in the eurozone, also released on Monday, similarly pointed towards rapidly falling confidence in the single currency.
This fell to -11.1 points from 6.6 in the previous three-month quarter – dipping below zero for the first time since 2014.
The Munich-based research firm, which surveyed 411 economic leaders, said “experts are more pessimistic about the current situation and future developments, and we expect the pace of economic growth in the euro area to grow”.
Additional reporting by Maria Ortega.