A new debt crisis threatens Europe

Will it be France or Italy, next…Greece? Debt crisis, ballooning deficits and austerity. These are some of the concepts that shone through the historical crisis our country has gone through in the past decade and that return to the present. No, but with a focus on Greece, where the Greek economy is now considered a model for financial management and for reducing the debt-to-GDP ratio. This time, at the heart of developments are the core countries Euro-zonelike France, and also… the usual suspicious Italy.

As it became known last week, France enters the club of countries at risk of a debt crisis. The fiscal deficit of Europe's second-largest economy was finally set at 5.5% in 2023, much higher than the 4.9% expected in the 2024 state budget.

Therefore, Macron's government will be asked to tighten its fiscal belts a little more. The return of austerity concerns not only France, but most of the EU countries (some less, some more), as the strict fiscal rules that were suspended during the pandemic return.

In fact, in yesterday's report, Société Générale It is estimated that the tools for financial problems will begin to appear next fall, when the draft 2025 budgets are submitted to the Commission.

Reading the figures on France's deficit, one notices something of particular importance. The 0.6% gap between projections and the final deficit is not due to increased spending, but rather to lower revenues. It is also clear that there is now a risk that France's public debt will become unsustainable.

The problem for Europe is that France is not little Greece. The French public debt jumped to 3 trillion. Euros at the beginning of 2023 from the level of 1 trillion. The euro is where it was in 2003. The debt-to-GDP ratio exceeds 112%, and with the French economy faltering, it could easily reach 130% soon, which is raising alarm bells in Paris, Brussels and throughout the Old Continent.

A higher-than-expected deficit would make it more difficult for the French government to get debt back on a sustainable path. Because the measures that will be implemented to reduce the deficit are likely to further weaken the economy and thus the GDP, leading to a rapid increase in public debt as a proportion of GDP.

The austerity and debt crisis is a vicious circle like the one that brought Greece to its knees, but on a different scale. It is also important that fiscal tightening measures of 0.5% are expected in the 2024 state budget and measures of 1.2% will eventually be needed.

If the French defaulted on their debts last year, which finally led to the French people showing much lower revenues and ballooning the deficit, imagine what might happen when austerity measures are implemented.

What will you do this time? Europe And when Germany Will he understand that the situation is unsustainable and that the European edifice is being exposed to a strong earthquake?

Public debt in Spain, Italy, Portugal, France, Belgium, and of course Greece exceeds 110% of GDP, and Italy's nearly 140% is considered the most serious case. The only reason Italy is not the first topic of discussion in Europe today is its government Georgia Meloni He did the job and was able to lay the foundation to put the debt back on a sustainable path.

However, the Italian government announced that the deficit for 2023 is 7.2% of GDP, about 2 percentage points higher than expected, and thus further austerity measures will be needed. Therefore, Italy is in no way safe from danger.

Even Germany faces its own problems and will be forced to implement more comprehensive austerity measures this year, following a Constitutional Court ruling that does not allow debt to increase from ill-gotten gains resulting from the pandemic. Things are not simple at all as it represents a €60 billion blow to the Solz government.

In conclusion, Europe is entering a new period of austerity, which will actually be much more difficult than initially expected, as one government budget after another falls. And all this at a time when economic activity has weakened, with Germany suffering from recession and the entire euro zone in complete economic recession, with minor exceptions such as Greece and Ireland.