European Debt Stabilizing

With third-quarter GDP data available we can now get an updated view of the government debt situation across the economically stagnant European Union.

For the first time in years there is actually a little bit of good news on the horizon. But before we get there, let us look at member-state debt ratios as of third quarter last year:

Third quarter 2014
Greece 176.0% Malta 71.9%
Italy 131.8% Netherlands 69.0%
Portugal 131.4% Finland 58.1%
Ireland 114.8% Slovakia 55.4%
Belgium 108.0% Poland 48.6%
Cyprus 104.7% Denmark 47.1%
Spain 96.8% Czech Rep. 43.4%
France 95.3% Latvia 40.4%
U.K. 92.6% Romania 38.4%
Austria 80.7% Sweden 38.4%
Hungary 79.1% Lithuania 38.3%
Slovenia 78.1% Bulgaria 23.6%
Croatia 77.8% Luxembourg 22.9%
Germany 74.8% Estonia 10.5%

Debt ratios appear to be plateauing. From the third quarter of 2012 to Q3 2013, seven member states decreased their debt ratios; from Q3 2013 to Q3 2014 eight countries experienced a decline. The following table reports changes in percentage points; for example, in Austria the debt ratio increased from 82.4 percent in Q3 2012 to 84.1 percent in Q3 2013 – a difference of 1.7 percent:

Debt ratio changes, third quarters
12 to 13 13 to 14
Austria 1.7% -3.4%
Belgium 2.0% 0.1%
Bulgaria -1.0% 6.6%
Croatia 6.6% 7.7%
Cyprus 22.5% 4.7%
Czech Rep. -2.5% -1.5%
Denmark -0.2% 0.2%
Estonia 0.6% 0.4%
Finland 3.1% 4.1%
France 3.1% 3.4%
Germany -2.2% -2.1%
Greece 18.6% 5.0%
Hungary -3.3% 2.0%
Ireland 0.7% -9.4%
Italy 5.5% 4.0%
Latvia -2.0% 2.1%
Lithuania -0.6% -0.8%
Luxembourg 6.2% -5.0%
Malta 3.6% -0.6%
Netherlands 3.7% 0.3%
Poland -0.6% -7.3%
Portugal 5.7% 3.6%
Romania 3.2% 0.2%
Slovakia 5.1% -1.1%
Slovenia 13.7% 16.8%
Spain 14.1% 5.0%
Sweden 1.2% 0.8%
U.K. 0.3% 5.5%

For the EU-28 as a whole the debt ratio has increased from 83.4 percent in 2012 to 86.6 percent in 2014. Euro-18 has seen a similar upward trend.

However, if we review the data on a quarter-to-quarter basis, things look a bit more optimistic. For the EU-28 there is a small decrease, from 87 percent in Q2 2014 to 86.6 percent in Q3 2014. The same marginal decline is visible in 18 member states. In eleven of them the decline is only marginal, i.e., less than one percentage point, an fact that is important to keep in mind.

That said, it would make sense that the debt ratio is stabilizing across Europe. The statist austerity measures applied in several countries the past 2-4 years have cut spending and increased taxes – not to reduce the size of government, but to make the welfare state more affordable in a new era of economic stagnation. Those measures have now re-aligned the welfare state with a smaller, non-growing GDP.

Greece appears to have achieved this alignment. Their debt ratio fell, quarter to quarter, for the first time since before the Great Recession:

Greece France Spain Debt Ratios

It is far too early to actually conclude that the debt ratios have stabilized. However, this first indication, embedded in third-quarter data, is encouraging in the sense that the crisis is over and an era of less-worse stagnation has begun.

What these numbers do not show, though, is any sign of a turnaround in the European economy. Less inflation, GDP growth remains in one-percent territory, which is actually worse than in 2011.

Lacking the economic and political willpower to recover, Europe has opted for the second-best alternative: economic stagnation and industrial poverty.