Scholarly article on topic 'Analysis of the Public Debt Sustainability in the Economic and Monetary Union'

Analysis of the Public Debt Sustainability in the Economic and Monetary Union Academic research paper on "Economics and business"

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Abstract of research paper on Economics and business, author of scientific article — Ramona Andreea Teică

Abstract Sustainability of fiscal and budgetary policies and therefore the sustainability of public debt is an intensely debated issue which has a particular importance in the public decision making. In Europe, the problem of sustainability public debt has become a subject of public interest after the introduction of single currency in the European Union. The growth of indebtedness of the member countries of the Economic and Monetary Union has raised extensive debate on the sustainable level of public debt. Hence, the paper has the purpose to analyze the sustainability of public debt in the member countries of the Economic and Monetary Union.

Academic research paper on topic "Analysis of the Public Debt Sustainability in the Economic and Monetary Union"

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Procedía Economics and Finance 3 (2012) 1081 - 1087

Emerging Markets Queries in Finance and Business

Analysis of the public debt sustainability in the Economic and

Monetary Union

Ramona Andreea Teica a *

aUniversity of Craiova, Faculty of Economics and Business Administration, Str. AI Cuza, Nr. 13, Craiova, Romania

Abstract

Sustainability of fiscal and budgetary policies and therefore the sustainability of public debt is an intensely debated issue which has a particular importance in the public decision making. In Europe, the problem of sustainability public debt has become a subject of public interest after the introduction of single currency in the European Union. The growth of indebtedness of the member countries of the Economic and Monetary Union has raised extensive debate on the sustainable level of public debt. Hence, the paper has the purpose to analyze the sustainability of public debt in the member countries of the Economic and Monetary Union.

© 2012 TheAuthors. PublishedbyElsevierLtd.

Selection andpeerreviewunder responsibility ofEmerging MarketsQueries in Finance and Business local organization.

Keywords: budget deficit; sustainability; public debt; budget policy;

1. Introduction

The public debt is one of the most frequent concepts of use in economic debates. For example, the countries are compared and classified according to the public finance sustainability starting off from the public debt. Likewise, the investors monitor carefully the risk of sovereign debt, and the managing offices of public debt

* Corresponding author. Tel.: +4-0762-094-254. E-mail address: ramona_teica@yahoo.com.

2212-6716 © 2012 The Authors. Published by Elsevier Ltd.

Selection and peer review under responsibility of Emerging Markets Queries in Finance and Business local organization. doi: 10.1016/S2212-5671 (12)00277-8

actively tries to reduce the afferent risks through financial and economic policies build-off especially to influence the future trajectory of public debt. As result, the public debt, as indicator of borrowing activity of the government was beginning to get a higher importance both at national and international level.

In a general acceptation, the public debt is the total sum of money own from the government to the creditors. It is sometimes presented as governmental debt or national debt include the money owned by the government inside the country internal debt or international creditors external debt.

Definition enshrined in international debt from research carried out by international bodies, which are the main business lending problems in providing countries with financial needs, presents gross external debt at a time as "total contractual liabilities used unpaid by residents to non-residents and residents obligation to repay capital rates, with or without interest or interest payment, with or without capital rates Klein, 1994.

The global financial crisis led to a rapid accumulation of public debt in most EU countries and the euro area. This meant, among other things, deterioration of the economic growth and in the automatic stabilizers, but also tax incentives and government support for the banking sector in many countries in the euro area Van Riet, 2010.

Sustainability of public debt means that accumulated public debt must be serviced at any time. This requires that governments must be solvent and liquid.

Medium and long-term solvency is the concept of net present value which means that the government is satisfied and states that the net present value of future primary balances the government to be at least as large as the net present value of the outstanding debt.

Liquidity is a short term concept and refers to the government's ability to maintain access to financial markets with the ability to serve all future short-term obligations.

Financial crisis, economic and sovereign of 2008-2010 has left behind a substantial tax burden for the governments of the euro area. Relations between public debt / GDP rose sharply as a direct consequence of the contraction of economic and counter cycling fiscal policies. Increased level of government borrowing in developing countries is likely to increase the financial costs of government with a possible adverse impact on private financing conditions and on private investment leading to lower growth potential. Moreover, sudden increases in government debt have adversely affected market confidence in government solvency and liquidity in several countries.

Sustainability of public debt can be broken down into short and long term sustainability. Short term sustainability targets that fiscal and budgetary policies must respond instantly to avoid excessive growth of indebtedness. If long term debt sustainability should be a time horizon far enough to identify the impact on state budget and commitments on the loans Campeanu, 2007.

In Zee 1987 vision, sustainability is stability as shown in the study on debt sustainability and optimum "level of external debt is one that allows the economy, in the absence of unanticipated exogenous shocks, to strive for balance." Blanchard, 1990, argued that sustainability can be ensured by fiscal and budgetary policies which do not generate rapidly rising indebtedness, increase the tax burden, significantly reducing spending, monetization of budget deficit or debt repudiation.

Regarding the convergence criteria under EU treaties on fiscal convergence criteria and the Stability and Growth Pact can say that public debt is sustainable if the budget deficit does not exceed 3% of GDP and indebtedness not exceeding 60 % of GDP. To meet these limits EU countries must first establish and then implement fiscal and budgetary policy in the medium term 3-5 years to ensure avoidance of excessive deficit.

In Romania, foreign government debt is defined, since 2005, by Law no. 313/2004 public debt as part of government debt which represents all external financial obligations of the state from loans guaranteed by the Government, the Ministry of Finance, on behalf of Romania, the foreign financial markets.

2. Debt situation in the EU and EMU

Deficit share in GDP in the European Union is represented in Figure 1.

1 (OMliklliti

□ 2008

□ 2009

□ 2010 □ 2011

Fig. 1. Deficit share in GDP. Source: Based on Eurostat data

In EU-27 deficit share in GDP fell to -6.5% in 2010 to -4.5% in 2011 and the euro area decreased from -6.2 to -4.1%. In 2011 rates were higher deficit threshold of 3% of GDP reference in 17 member states. Ten member states recorded a government deficit has exceeded 3% for the entire reporting period 2008-2011. The larger public deficits as a percentage of GDP in 2011 were registered in Ireland -13.1%, Greece -9.1%, Spain -8.5% and UK -8 3%. Twenty-five member states have seen reduced government deficit, relative to GDP or have seen expanded government surplus in 2011 compared to 2010. Hungary, Estonia and Sweden registered a government surplus in 2011. Seven member states, namely Bulgaria, Denmark, Germany, Luxembourg, Malta, Austria and Finland in 2011 showed deficits below the 3% threshold. Two member states, Cyprus and Slovenia - have larger deficits in 2011 than in 2010.

In terms of public debt in GDP graphic situation is represented as it follows:

180 160 140 120 100 80 60 40 20

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□ 2008

□ 2009

□ 2010 □ 2011

Fig. 2. Public debit in GDP. Source: Based on Eurostat data

The highest rate of public debt as a percentage of GDP at the end of 2011 is recorded in Greece 165.3%, Italy 120.1%, in Ireland 108.2% and Portugal 107.8 % and the lowest rate of public debt in Estonia 6%, Bulgaria 16.3%, and Luxembourg 18.2%.

At the end of the first quarter of 2012 the public debt in GDP in the euro area EU17 has increased to 88.2% compared to 87.3% as it was in late 2011. EU countries this rate increased from 82.5% to 83.4%. Comparing the first quarter of 2011 public debt to GDP ratio increased in both the euro area from 86.2% to 88.2% and in

the EU27 from 80.4% to 83.4%. At the end of first quarter 2012 securities other than shares in public debt represented 78.3% in the euro area and 79.3% in EU 27. Loans represented 17.8% in the euro area and 15.6% in the EU27 public debt and currency and deposits 2.8% in euro area and 3.8% respectively in the EU27.

Regarding the countries with the highest share of public debt in GDP after the first quarter of 2012 as the situation is kept to the highest levels in Greece 132.4%, Italy 123.3%, Portugal 111, 7% and Ireland 108.5% while in Estonia the lowest recorded rate debt as a share of GDP 6.6%, followed by Bulgaria 16.7% and Luxembourg 20, 9%.

Evolution of deficit and indebtedness in the EMU member countries is presented in Figures 3 and 4.

■*— Belgium •— Gern-sny Estonia Ireland

— Greece

— Spain -i— France

---Italy

— Cyprus

Llk errtoourj Malta

Netherlands Austria

Fig. 3. Evolution of budget deficit in EMU countries. Source: Based on Eurostat data

Fig. 4. Evolution of indebtedness in the EMU member countries. Source: Based on Eurostat data

Following the evolution in the EMU budget deficit in four years under review we see that the required level of 3% was observed than in 2008. Any indebtedness imposed in 60% of GDP threshold was not reached in EMU in 2008-2011 with much higher levels. Also watching how much tax is made on the budget deficit criterion broken down by EMU member countries found that only Estonia and Luxembourg meet this criterion in all four years analysed and Finland only in 2009, 2010, 2011.

EMU member states the indebtedness is below the 60% of GDP in Estonia, Luxembourg, Slovenia, Slovakia and Finland. The member states of the EU but not EMU indebtedness is held in Bulgaria, Czech Republic, Denmark, Latvia, Lithuania, Poland, Romania and Sweden.

3. Evolution of external public debt of Romania in the period 2008-2011 compared with central and eastern european countries

To get a clearer picture we made an analysis on five developing countries: Romania, Bulgaria, Hungary, Poland and Czech Republic. All these countries are currently members of the European Union are located in Central and Eastern Europe and they have not adopted the euro.

Below I tried to learn as influenced external debt ratio to GDP by the revenue and expenses.

60 50 40 30 20 10 0

-Czech Republic

- Hungary

- Poland Bulgaria Romania

Fig. 5. The share of government revenues in GDP. Source: Based on data provided by the Public Finances in EMU 2011

The five countries analysed in the period analysed had significant fluctuations in the share of revenues in GDP. All these countries share a similar cycle.

60 50 40 -30 -20 10 -0

-Czech Republic Hungary Poland Bulgaria Romania

Fig. 6. The share of government expenditures in GDP. Source: Based on data provided by the Public Finances in EMU 2011

For all countries surveyed is observed overall higher expenses than revenue, additionally preserving the correlation between revenue and expenditure developments. All countries examined in this regard have current account deficit.

90 80 70 60 50 40 30 20 10 0

Czech Republic

Hungary

Poland

Bulgaria

Romania

Fig. 7. External public debit. Source: Based on Eurostat data

In all countries there is a steady increase in external debt during the period examined, Bulgaria recorded the lowest rate. Bulgaria has evolved more linear compared to other countries in the analysis.

Structure of government debt as a percentage of GDP is represented in Fig. 8, achieving its breakdown in internal and external debt.

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Fig. 8. The structure of government debt as a percentage of GDP. Source: Based on data provided by the Ministry of Finance

It should be noted that, to cover budget deficits, the Romanian authorities have called in 1990-1995, predominantly, foreign loans, then, with lower ratings given by international specialized agencies, domestic borrowing was used in an increasing proportion. Improving rating given by specialized international agencies from years 1999-2000 led to a shift to external financing.

4. Conclusions

Ensuring debt sustainability can be achieved through a mix of fiscal and budgetary policies, which aim to reduce budget deficits and increasing primary surpluses and monetary policy measures in order to ensure monetary stability.

Internationally, increasing borrowing countries has generated extensive debate on identifying sustainable level of debt.

I think that in the absence of fiscal consolidation efforts and structural reforms in EU member states there will be explosive growth of public debt interest payment of expenses and social security system. Increased public spending and public debt volume to ear as a real obstacle to recovery and sustained long-term balanced growth.

In Romania the way it accumulates debt is very important. Reinhart and Rogoff studies 2010 argue that the war debts are less problematic for future growth, because after the war naturally lower costs, while peacetime duty explode persistent for long periods of time. Up to a certain threshold, accumulation of foreign debt can be financed through investment, but beyond a certain value limit, not one investor will not want to provide economic capital and this will weaken. I believe that legislative change is needed first, requiring a rethinking of the structure of budgetary expenditures as simply adjusting the budget deficit is insufficient.

As before, foreign loans are used to cover the current account deficit, therefore, are driven to consume again. Romania does not know how to effectively manage a foreign public debt, therefore debt policy is caught in a vicious circle, that of consumption.

Acknowledgements

"This work was supported by the strategic grant POSDRU/CPP107/DMI1.5/S/78421, Project ID 78421 2010, co-financed by the European Social Fund - Investing in People, within the Sectoral Operational Programme Human resources Development 2007 - 2013".

References

Blanchard, O., 1990, "Suggestions for a New Set of Fiscal Indicators", OECD Economics Departament Working Papers No. 79. Cämpeanu, E. M., 2007, "Analiza sustenabilitäjii datoriei publice in Uniunea Economicä §i Monetarä", Conferinla Internajionala "Politici financiare §i monetäre in Uniunea Europeanä", Bucure§ti, Romania.

Klein, Thomas M., 1994, "External Debt Management - An Introduction', World Bank Technical Paper Number 245, Washington, D.C., p. 56.

Reinhart, C. M., Rogoff, K. S., 2010, "Growth in a Time of Debt", NBER Working Paper No. 15639.

Van Riet, A. (ed), 2010, "Euro fiscal policies and the crisis", Occasional Paper Series, No 109, ECB, Frankfurt am Main.

Zee, H., 1987, "On the Sustainability and Optimality of Goverment Debt", IMF Working Paper WP/87/83.

www.mfinante.ro

http://ec.europa.eu/economy_finance/publications/european_economy/2011/pdf/ee-2011-3_en.pdf www.ec.europa.eu/eurostat/