The European Central Bank warned that euro zone countries face “huge fiscal burdens” from ageing populations, extra defence spending and climate change, making it more urgent to reduce high debt levels.
Central bank officials estimate that euro zone countries would need to cut their budget deficits by an average of 5 percentage points of GDP, which would require savings or additional revenues of 720 billion euros at current output levels.
The ECB assessed the fiscal challenges facing the single currency area's 20 nations as the European Commission scolded France and six other countries for breaching EU fiscal rules, raising investor concerns about the sustainability of public finances.
Eurozone countries' debt levels have soared and attracted attention due to rising government spending to protect households and businesses from the energy crisis caused by the COVID-19 pandemic and Russia's invasion of Ukraine.
In France, the prospect of a general election has spooked investors, with the far-right Rally National and a new left-wing coalition leading in opinion polls and both promising big spending that could put them at odds with both bond investors and the EU.
The ECB said pressure on EU finances would only grow in the coming years, estimating that countries would need extra fiscal efforts worth an average of 3% of GDP starting this year to meet growing demands from an ageing population, climate change and rising defense spending through to 2070.
This is in addition to the need to bring debt levels down to the EU limit of 60% of GDP by 2070, which the ECB says would require countries to save an extra 2% of GDP on average “immediately and permanently”.
“Each of these developments would be difficult enough on its own, but countries face all of them at the same time,” the ECB said. “Acts must therefore be taken now, particularly in highly indebted countries facing high interest rates and the associated risks.”
The ECB's estimates of the size of the fiscal effort countries need to make to reach the 2070 target vary widely: Slovakia estimates it will need to save 10% of GDP and Spain 8%, while Estonia, Croatia, Greece and Cyprus would need to save less than 2% of GDP.
“The necessary fiscal adjustment is large by historical standards but not unprecedented,” the report said, noting that some countries, such as Belgium, Ireland and Finland, had primary balances, excluding interest payments, of more than 5 percent of GDP for more than a decade in the 1990s and early 2000s.
The ECB warned that the costs of tackling climate change could be much higher if global warming remains at 1.5C above pre-industrial levels, but said positive spillovers from increased spending, structural reforms, digitalisation and globalisation may not have been captured in its models.
“The longer we delay adjustment, the greater the eventual cost of adjustment will be, so there is no room for complacency,” he warned. – Credit: Financial Times
