Euro zone's debt stabilizes as north-south split emerges

BRUSSELS Wed Jan 23, 2013 10:33pm IST

1 of 4. Men look at newspapers at a kiosk in downtown Lisbon January 23, 2013.

Credit: Reuters/Rafael Marchante

BRUSSELS (Reuters) - Public debt levels in the euro zone neared their projected peak last year after more than a decade of huge borrowing, but data also highlighted a divide between the richer north and Mediterranean countries where the burden is still growing.

Government debt stabilized at 90 percent of economic output in the 17 nations sharing the euro in the third quarter, barely changed from 89.9 percent in the second, the EU's statistics office Eurostat said on Wednesday.

With public debt expected to peak at 94.5 percent in all of 2013, according to European Commission forecasts, the stabilization is another sign the euro zone has a chance to emerge from a banking and debt crisis that nearly destroyed it.

But while the Commission expects debt to start falling from 2014, it is still above the 90 percent level that economists consider damaging for growth.

It is also well above the EU's limits for a healthy economy and will take decades to pay down.

Europe's debts soared from the EU-mandated limits of 60 percent of gross domestic product following the introduction of the euro in 1999, as countries from Spain to Ireland indulged in massive borrowing at very low rates of interest.

A divide now exists between France and Germany on the one hand, where debt fell slightly in the third quarter from the second, and the economies of Ireland, Greece, Portugal, Spain and Italy, whose debt-to-GDP ratio rose in the July-September period.

Debt in Ireland, where a burst real estate bubble forced the country into an international bailout, reached 117 percent of economic output in the quarter, while the number was 127 percent in Italy. Spain saw its burden tick up to 77 percent of GDP, and the Commission sees it reaching 97 percent in 2014.

Greece's debt rose to 153 percent of GDP in the quarter and will reach 189 percent in 2014, although a deal struck by euro zone finance ministers and the International Monetary Fund in November aims to take it down to 124 percent by 2020.

Rising debt is particularly worrying for Italy and Spain, the euro zone's third- and fourth-largest economies, which are in recession and need growth to cut debt and unemployment.

Italy's Economy Minister Vittorio Grilli admitted as much in Brussels this week, saying the country's economic recovery from 2014 would be "inadequate".

Compared to the United States and Japan, the euro zone looks better off, with economists seeing U.S. debt at 115 percent of GDP by 2016 and the Japanese burden climbing to an eye-watering 250 percent by then.

But the European Commission, which has powers to police countries' debts and wants to avoid the borrowing binges of the past, says that is no excuse, and its top economic official warned earlier this month of the costs to growth.

"When public debt levels rise above 90 percent they tend to have a negative impact on economic dynamism, which translates into low growth for many years," EU Economic and Monetary Affairs Commissioner Olli Rehn told diplomats in a speech. "That's why consistent fiscal consolidation remains necessary."

(Reporting by Robin Emmott; Editing by Hugh Lawson)

Diplomacy

Reuters Showcase

Microfinance

Microfinance

Funding the unfunded: India helps small business borrow to grow  Full Article 

Insurance Sector

Insurance Sector

UK healthcare firm Bupa sees strong growth in India  Full Article 

Sensex Rises

Sensex Rises

Sensex edges up; consumer and healthcare stocks rise  Full Article 

Market Eye

Market Eye

FTSE adds nine Indian firms as large-caps in Asia-Pacific ex-Japan index   Full Article 

Udwin Interview

Udwin Interview

Society created Delhi gang rape convicts: Filmmaker Leslee Udwin  Full Article 

China Economy

China Economy

China signals "new normal" with lower annual growth target  Full Article 

E-commerce

E-commerce

China backs e-commerce expansion in win for Alibaba, JD.com  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage