ANZ Morning Brief: The costs of austerity

THE COSTS OF AUSTERITY. With recent debate over austerity and its likely costs, last night’s fiscal debt and deficit data for Europe made for interesting reading. Encouragingly, the Eurozone general government budget deficit fell to 3.7% of GDP in 2012 from 4.2% in 2011, the lowest since 2008, comparing favourably with deficits for the US and UK (over 8% of GDP) and Japan (10%+). The improvement in Germany ’s books, to a 0.2% surplus, accounted for almost 60% of the narrowing of the overall Eurozone deficit. France ’s budget deficit (4.8% of GDP) missed its deficit goal, the Spanish, Greek and Portuguese budget deficits all widened, with deficits of the former two 10% of GDP or more. The public debt numbers made for grim reading, with Eurozone gross debt rising to 90.6% of GDP.  Gross debt in Spain (84% of GDP) and Portugal (124%) were around 10 percentage points higher than October 2011 European Commission forecasts, while Italy ’s debt burden rose from 121% to 127% of GDP. There are real costs. The Eurozone economy is mired in recession, with larger falls in output for Italy , Spain and the southern periphery. The unemployment rate is a record high at 12%, with the rate more than twice that in Spain , which for the first time in decades experienced a fall in population as many foreign residents left. With EU Commissioner Rehn noting at the G20 meeting that financial leaders calling for less austerity were “preaching to the converted”, the likelihood is for a pushing back of the deficit limits to 2015 from the 2014 target outlined in the EU’s Fiscal Compact. At the very least, stronger core Eurozone economies are likely to have to keep providing the troubled periphery with support long after their existing bailouts end.

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