In the long term, getting eurozone countries back to the EU’s official budget targets would require extensive austerity measures, according to a research paper published by the European Central Bank on Wednesday, June 19. In total, to return to a 60% ratio of public debt to gross domestic product (GDP) by 2070, the 20 eurozone countries would, in theory, have to structurally reduce their spending by an average of 5% of their GDP, starting as early as 2025. Such fiscal consolidation is not unprecedented, the study explains, but historically, it has mainly occurred after a serious public finance crisis.
The study’s estimations comprise two dimensions. The first simply takes into account the already deteriorated state of eurozone countries’ public finances. After the eurozone crisis, the Covid-19 pandemic and the shock provoked by the recent rise of inflation, many countries, including France, are a long way from the official target of a 60% public debt-to-GDP ratio, as required by the EU treaties. To reach this limit by 2070, public spending would have to be cut by an average of 2% of GDP per year. Slovakia, Italy and France, which are among the countries requiring fiscal consolidation of more than 4%, would be the three most at-risk countries, according to this analysis.
In addition to this current, well-documented budget slippage, the study noted three long-term challenges that will weigh heavily on these countries’ public finances. The first is the huge demographic bomb of aging populations and falling birth rates. This will increase the cost of pensions and healthcare systems. To cope with this, public spending would, on aggregate, have to increase by 1.4% of GDP, according to the study. France is one of the least exposed countries in this respect, while Spain (which will require 3% of additional expenditure), Belgium (2%) and Germany (close to 1.5%) are among the most vulnerable.
Drastic cuts
The second challenge is the return of war in Europe. To reach the NATO target of 2% of a country’s GDP allocated to its defense budget, eurozone countries would have to increase their military spending by 0.5% of their total GDP. Here again, France is less exposed, being already close to the official target.
The third challenge is climate change. The article assumes that the EU will honor its promise of “net zero emissions” of greenhouse gases by 2050, which would enable global warming to be limited to 2ºC. On the one hand, this would require a yearly spending increase of around 0.4% of GDP. On the other hand, an increase in extreme weather events would also have a significant cost, reaching 2% of GDP per year by 2032 for the eight countries most affected by such phenomena.
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