Conquering Europe’s Debt Mountain

BERLIN – The International Monetary Fund estimates that the crisis-induced net cost of financial-sector support provided by G-20 countries in 2009 amounted to 1.7% of GDP ($905 billion), while discretionary fiscal stimulus amounted to 2% of GDP in both 2009 and 2010. All the eurozone countries, except Luxembourg and Finland, reported fiscal deficits in excess of 3% of GDP in 2009, while Greece, Spain, and Ireland ran deficits of more than 10%. Within a single year, eurozone governments’ general debt increased by almost 10 percentage points (78.7% of GDP in 2009, compared with 69.3% in 2008).

As for Germany, the 2010 federal budget features a record-high deficit of well above €50 billion. Public-sector debt will surpass €1.7 trillion, approaching 80% of GDP. Interest payments, which consume more than 10% of Germany’s federal budget, will grow along with the mounting debt burden – and even faster if interest rates rise.

Yet the financial crisis and the ensuing recession go only so far towards explaining these high levels of indebtedness. The truth is that many European and G-20 countries have lived far beyond their means – including Germany, despite its reputation as a paragon of fiscal rectitude.

Even in good times, governments have for too long been spending more than they received. Perhaps worse, some also spent more than they could easily repay, given their economies’ declining long-term growth potential because of the aging of their populations. Such profligacy has led to levels of debt that will become unsustainable if we do not act.