布鲁盖尔-High-public-debt-in-euro_14页_631kb

Summary of "High public debt in euro-area countries: comparing Belgium and Italy"

Core Content

This policy contribution compares the evolution of public debt in Belgium and Italy since 1990, focusing on the contrasting paths taken by the two countries in managing their debt levels before, during, and after the introduction of the euro, as well as during the sovereign debt crisis.

Main Points

• Public Debt Levels:

  • In the early 1990s, both countries had public debt ratios around 130-140% of GDP, but Belgium managed to reduce it more effectively.
  • By 2017, Belgium’s public debt was at 103% of GDP, while Italy’s was at 131%, reflecting a significant divergence.
  • Italy's GDP per capita was 20% lower than Belgium's in 2017, compared to being similar in 1999.

• Debt Dynamics:

  • The debt-to-GDP ratio is influenced by the primary deficit/surplus, real interest rates, and GDP growth, as described by the debt dynamics equation:
    $$
    \Delta b = d + (r - g) b
    $$
    where $b$ is the debt-to-GDP ratio, $\Delta b$ is the change in the ratio, $d$ is the primary deficit/surplus, $r$ is the real interest rate, and $g$ is the real GDP growth rate.

• Pre-Euro Period (1990-2007):

  • Both countries peaked at high debt levels after the Maastricht Treaty (1992).
  • Belgium reduced its debt ratio by 51 points of GDP (from 138% to 87%), while Italy reduced it by only 27 points (from 127% to 100%).
  • Three Key Factors:
    1. Primary Surplus: Belgium achieved an average of 4.7% of GDP, while Italy only reached 2.9%.
    2. GDP Growth: Belgium grew at 2.4% annually, whereas Italy grew at 1.7%.
    3. Real Interest Rates: Italy had lower real interest rates (3.7%) than Belgium (4.3%), but this did not offset the slower debt reduction.

• Early Euro Period (2007-2010):

  • Both countries faced a debt increase due to the financial crisis, but Belgium's economy was more resilient.
  • Italy’s banking sector had a much higher NPL ratio (5.6% in 2007) compared to Belgium’s (1.4%), which became a significant vulnerability.
  • Markets initially treated Italian and Belgian debt similarly, but the Greek crisis in 2010 led to a widening spread in bond yields in favor of Belgium.

• Crisis Period (2011-2017):

  • Italy adopted austerity measures in 2011, which worsened its economic performance and increased its debt ratio.
  • Belgium, by contrast, continued to run small primary deficits and maintained GDP growth, which helped keep its debt ratio stable.
  • Italy's GDP per capita fell behind Belgium's significantly, and its banking sector deteriorated further, with NPLs rising to 16.5% in 2013.
  • Rating agencies downgraded Italy’s sovereign debt multiple times, while Belgium’s rating remained strong.

• Political Factors:

  • Political instability in the 1970s-1990s contributed to high debt accumulation in both countries.
  • After Maastricht, Belgium showed stronger political commitment to fiscal discipline and structural reforms, while Italy lagged.
  • During the crisis, Belgium's political class demonstrated a stronger commitment to debt sustainability and euro membership.

Key Information

• Debt Reduction:

  • Belgium’s debt-to-GDP ratio fell from 138% in 1993 to 87% in 2007.
  • Italy’s debt-to-GDP ratio fell from 127% in 1994 to 100% in 2002, but then stagnated and increased again after 2011.

• Growth Performance:

  • Belgium’s GDP per capita increased by nearly 20% between 1999 and 2017.
  • Italy’s GDP per capita remained flat, leading to a significant gap in living standards.

• Structural Reforms:

  • Belgium implemented more effective structural reforms, which boosted productivity and growth.
  • Italy failed to implement similar reforms, leading to persistent low growth and high debt.

• Austerity Impact:

  • Austerity measures in Italy during 2011-2013 led to a deep recession, with GDP contracting by 2.8% in 2012.
  • Belgium managed to avoid contraction, maintaining a modest growth rate and stable debt levels.

• Sovereign Ratings:

  • Italy's sovereign ratings were consistently lower than Belgium's, reflecting its higher vulnerability.
  • The spread in bond yields between Italy and Belgium increased sharply in 2011, indicating a loss of market confidence.

Conclusion

The study concludes that Italy's current debt situation is not a result of the euro, but rather due to its failure to implement effective fiscal adjustments and structural reforms before the crisis. Belgium, by contrast, managed to reduce its debt and maintain economic growth through better political commitment and institutional reforms. The euro, if used effectively, could have been a tool for Italy to achieve similar outcomes.