European countries find themselves in something of a bind: with increasing debt and stuttering growth, Europe is falling behind its major competitors, China and the USA. But with the European elections this year, it is also a time of renewal for the continent, one explained clearly in Mario Draghi’s recent report on competitiveness. Let’s take a closer look at each of these topics.
Debt-to-GDP ratios across the world increased during the Covid crisis, and in Europe in particular as governments aimed to provide a safety net for their citizens. However, some European countries are now struggling to return to their previous levels of debt, a problem exacerbated by ballooning interest payments. These countries must now tighten their belts in order to reduce their budget deficits, with the hope of returning to a more sustainable debt burden. Advanced European economies should be aiming to shrink their respective deficits by one point of GDP on average; for emerging economies, this figure comes close to three points. Of course, the picture is not homogeneous across the continent. France, for example, must reduce its deficit by some four points of GDP or around 100 billion euros, requiring significant efforts to be made in the years to come.
Public-debt-to-GDP ratios: often worrying levels for European public finances
Source: Accuracy & Eurostats
The graph below shows the gross financing needs (GFN) of European countries (essentially their budget vulnerability and debt viability), plotted against their debt-to-GDP ratios. The GFN corresponds to the amount each government must raise on the market to cover its budget deficit and repay its maturing debt. The higher the GFN value, the more the country must borrow in the short term, exposing it to considerable market risks. The chart shows that southern European countries appear to be in a tighter spot than others. If debt-to-GDP ratios stabilise without falling, demand for short-term debt risks increasing significantly.
An increased risk that european economies will resort more often to short-term debt
Source: IMF
The European Union recently published a report on its competitiveness by Mario Draghi, a former president of the European Central Bank and prime minister of Italy, among many other prestigious roles. This report revealed several findings of note: whilst Europe remains a major player in the world economy, its growth is slowing, remaining significantly below that of China, but also that of the United States. What is more, three global transformations are putting Europe at a disadvantage: the slowdown in global trade, the loss of a relatively cheap energy supply and growing geopolitical instability. Based on these observations, according to Draghi, three priorities emerge: (i) to catch up in terms of innovation in order to stimulate productivity and boost growth; (ii) to reduce the cost of energy, taking advantage of industrial opportunities linked to decarbonisation; and (iii) to strengthen the economic security of the EU, reducing its level of dependence on imported raw materials, technology and military equipment. And to pursue these three priorities, three levers must be activated: (i) the single market must be fully implemented; (ii) the rate of investment must be increased to reach five points of GDP; and (iii) the governance of the Union must be restructured to reinforce coordination and reduce regulation.
Draghi’s report was praised for its perspicacity and the realism of the observations made and solutions proposed. However, it is worth considering a few additional questions: Should the benchmark automatically be China or the USA? Are industrial and commercial policy tools the best suited to bring about this change? Is productivity the only solution? And how can we commit to an annual investment effort of five points of GDP? Economic necessity and political expediency may prove to be incompatible in the short term. One further issue remains: the EU has a bad habit of producing reports and not necessarily following through with them. Will this one prove to be an exception?
This year, the European Commission (EC) has been renewed, following the election of Ursula von der Leyen for her second term as EC president. Can we infer any underlying message from the nomination of her executive vice presidents as shown in the map opposite? Two stand out: (i) the representation of Finland, Estonia and Romania suggests that, unsurprisingly, the defence of the EU’s eastern border is somewhat of a priority; and (ii) the nomination of candidates from Spain, France and Italy, Europe’s traditionally more interventionist, spendthrift economies, might just signal more European interventionism in matters of economic policy. This could indeed be taken as a positive sign for the Union to pursue the recommendations of the Draghi report. However, digging a little further, it is interesting to note that these executive vice presidents are supported by numerous liberal Centre and Centre-Right commissioners, who will no doubt temper some of the more extravagant spending habits of the European south. Reality in Brussels may be rather more German than not…
