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Eurozone: Ongoing fiscal support

4/30/2021

European public finances have been put to the test by the economic recession, health spending and massive state support for businesses and households. By releasing the first estimate of public debts and deficits in the area, Eurostat revealed the bill, at least for 2020.

Frédérique CERISIER

TRANSCRIPT // Eurozone: Ongoing fiscal support : April 2021

European public finances have been put to the test by the economic recession, health spending and massive state support for businesses and households. By releasing the first estimate of public debts and deficits in the area, Eurostat revealed the bill, at least for 2020. The eurozone's public debt ratio finally settled just below the symbolic threshold, at 98% of GDP. It is up by 13 points of GDP over a year, a larger increase than that was recorded in 2009, during the global financial crisis.

Spain, Greece or Cyprus are the most affected countries, with their ratios increased by around 25 points of GDP. Italian, French, Belgian and Portuguese public finances are also hardly hit. Among the large countries, Germany and the Netherlands, on the other hand, drag the European average downwards, with a debt ratio increasing by only 10 and 6 percentage points of GDP respectively.

Keep in mind, however, that this increase does not lead to a strong and global deterioration in the sustainability of European public finances. Firstly, because a very significant part of this additional debt is now held by the Eurosystem. And secondly because sovereign interest rates are likely to remain at historically low levels in the coming years, easing the refinancing of public debts. Still, the divergence of national fiscal positions within the euro area has widened further with the Covid crisis, a trend that Member States should worry about.

For the time being, the key priority is avoiding repeating the mistakes of the past with an early tightening of fiscal policy. A further increase in public debt is therefore very likely this year. Member States should also start benefiting from grants from the Next Generation EU plan in the second half of the year. The amounts involved are substantial for the weakest countries. Their recovery plans detailing the planned investments are being sent to Brussels these days.

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