E.U. Data Shows Reduced Deficits but Higher Debt Burdens

PARIS — An austerity push in Europe helped to reduce government budget deficits in 2012 for a fourth straight year, official data showed Monday, but debt burdens grew amid a recession that was expected to last through 2013.

Outlays exceeded revenue by 3.7 percent in the 17-nation euro zone, down from 4.2 percent in 2011, Eurostat, the E.U. statistical agency, reported from Luxembourg. For all 27 nations of the European Union, the government deficit fell to 4 percent from 4.4 percent.

Euro zone debt measured as a percentage of gross domestic product rose to 90.6 percent, from 87.3 percent in 2011. For the entire Union, debt rose to 85.3 percent of G.D.P. from 82.5 percent a year earlier.

Ben May, an economist in London with Capital Economics, noted that the numbers appeared impressive, comparing favorably with those of the United States and Britain, where government deficits last year exceeded 8 percent of G.D.P., and with Japan, where the deficit was more than 10 percent.

“But the fact that most economies’ deficits have fallen by less than expected and that the consolidation has coincided with deeper than anticipated recessions confirms that the costs have been large,” Mr. May wrote. And he noted that Germany, which last year posted a small budget surplus, accounted for about 60 percent of the improvement.

Austerity began in Europe when, after the credit bubble collapsed, speculative attacks began on the sovereign debt of euro members like Greece, Ireland, Portugal and Cyprus. Led by Germany, governments responded with a reaffirmed commitment to hold their deficits to a maximum of 3 percent of G.D.P, and debts to no more than 60 percent.

Fiscal “hawks” argue that deficit spending is merely a means of pushing the cost of politically unpopular action onto future generations. But austerity, whereby government spending is cut and taxes increased, reduces demand in the overall economy and drives up unemployment, at least in the short term.

If it causes recession, austerity may also make it harder to reach debt-reduction goals, since the denominator of the debt-to-G.D.P. ratio shrinks.

The euro zone economy contracted 0.3 percent in 2012, and economists expect another decline this year. While there was a general consensus in Europe about the need for tough budget-balancing measures, especially as Germany, amid election-year politics, was unwilling to consider alternative action, the tide may now have begun to turn given continuing economic weakness and a euro zone unemployment rate of 12 percent.

France’s deficit last year, at 4.8 percent of G.D.P., fell short of President François Hollande’s target of 4.5 percent. Spain posted a budget deficit of 10.6 percent, worse than the 10.2 percent the European Commission had forecast. Both countries face a struggle to meet their financial targets for 2013 amid the economic malaise, economists say.

Greece, the E.U. member most battered by the crisis, posted a deficit of 10 percent of G.D.P., up from 9.5 percent a year earlier. Its debt fell to 157 percent of G.D.P. from 170 percent after a bailout in which bondholders were forced to write off part of the value of their Greek holdings.

Article source: http://www.nytimes.com/2013/04/23/business/global/eu-data-shows-reduced-deficits-but-higher-debt-burdens.html?partner=rss&emc=rss