The EU warned Tuesday that the eurozone requires permanent tough austerity measures if it is to cope with public debt set to crash through the 100-percent-of-GDP barrier and keep rising for many years.
With an ageing population piling up social security and pension costs, the European Commission says a radical long-term correction is required to put public debt throughout the 17-nation euro currency area on a sustainable path.
“The deterioration in the public finances of the euro area since the onset of the economic and financial crisis comes on top of already high starting levels of debt,” the Commission said in its quarterly report on the euro area.
This “at a time when the European economies are facing the prospect of the sustainability challenge of an ageing population,” it added.
The report used projections for future age-related spending and concluded that “in the absence of additional consolidation measures” the overall picture would show “debt passing the 100-percent-of-GDP mark over the next 15 years and continuing to increase thereafter.
“It is clear that in order to reverse the increases in (debt) growth and ensure the sustainability of public finances, significant permanent consolidation measures — over and above those already introduced — will be necessary in a number of euro area countries.”
The EU has a 60 percent limit on total debt as a percentage of Gross Domestic Product but most member states have breached this level — and the annual budget ceiling of 3.0 percent — for years.
Calls for greater austerity have run into opposition, however, on the grounds that such a course will only slow the economy further, making the debt problem even worse as governments see their tax revenues fall.
Last week, International Monetary Fund Europe director Antonio Borges said in a report on the eurozone that “the pursuit of nominal deficit targets should not come at the expense of risking a widespread contraction in economic activity.”
The Bank of England then announced a new round of pump-priming measures to boost economic growth, with economists arguing that the European Central Bank will need to do something similar soon.