European Debt Crisis - Are We Out of the Woods Yet?

The crisis hit Europe hard in 2011 and it was coined “the sovereign debt crisis”. Several European economies witnessed the collapse of their financial institutions, excessive government debt and quickly rising bond yield spreads in government securities. Six years on, a Long Term Refinancing Operation (LTRO) later, a number of strict austerity packages implemented, numerous attempts at labour market reforms – has the debt problem been solved? The short answer is no. The longer answer is – it depends. The performance across different European geographies varies greatly – many Southern European countries continue to struggle while the Northern European countries are faring much better.

Greece, Portugal, Ireland and Spain were among the worst affected and in need of financial assistance from the ECB at the time. Looking at their debt levels (expressed as country’s total gross government debt as a percentage of its GDP) between 2006 and 2016 year 2011 saw a spike although a strong upward trend began back in 2008 when the first wave of the crisis hit.



Source: OECD. Data for Ireland 2016 is unavailable

Despite financial assistance provided Greece has been seeing increases in its government debt through the entire post 2011 period. In fact in 2016 its general government debt sat at its highest, a whopping 185.2% of GDP level. Similarly, Spain drastically racked up its debt levels from 45.7% of GDP back in 2006 to 117.2% in 2016. It has made serious inroads into restructuring its economy and the labout markets – which is a primary reason behind the slowdown in its debts increases.

Portugal has just reached an important milestone in its recovery and it was announced on Monday the 22nd of May 2017 that the country is no longer in breach of the bloc’s budget rules. This statement from Brussels reflected improvements in the economic environment and unemployment drop to eight year low. The European Commission stated that Portugal’s budget deficit fell to 2% of GDP in 2016 – below the 3% limit set out in the budget rules and the lowest for Portugal since 1999. The commission now recommends that Portugal leaves the “excessive deficit procedure” – an important step in the country’s economic recovery.

Ireland was one of the best performers in turning their 2011 collapse around. The general government debt levels reached its peak in 2013 at 132.7% of GDP and were declining consistently since. The general budget debt stood at 91.5% of GDP in 2015. Primary reasons for this relatively speedy recovery was substantial economic restructuring and commitment to austerity to correct the deficits.

Finland, an economy which suffered the worst in the Eurozone crisis outside of Southern Europe was given more time by the European Commission to meet the budget deficit targets with the government rolling a series of economic reforms to pensions and the labour market. According to today’s statement from the European Commission only three countries – France, Spain and Greece – remain in the corrective part of the EU’s stability and growth pact rules, compared with 24 countries at the height of the crisis.

 Northern European and Scandinavian countries fared better with their debt levels. Germany, Denmark and Sweden have been seeing declines since 2013 – 2014. Germany did see its debt levels go up to above 80% post 2008 spike but it is currently managed very well. Sweden and Denmark saw its debt levels stay below 65% of GDP as these economies have very strong economic structures in place and consistently exhibit solid labour market performance.
 


Source: OECD

All in all the picture of debt varies greatly across geographies – many Southern European economies continue to struggle and have a lengthy road to go with restructuring and Northern European economies are faring better with lower debt levels. That said, most economies have made inroads into recovery and debts levels are set to see gradual declines over the coming years.