The eurozone’s new year heralds a debt crisis that has alarm bells ringing and markets tracking government plans to tame the growing shortfall.
Officials have borrowed heavily to pull the 16-nation zone out of its first recession, and debt levels are set to smash a huge hole in the ceiling set by the EU in its Stability and Growth Pact.
Soaring budget deficits, low growth and banking sector support “are feeding into significantly higher public debt levels,” the European Commission has warned.
Average eurozone “public debt could reach 84 percent of GDP by 2010, an increase of 18 percentage points from 2007,” it said, far above the pact’s limit of 60 percent.
Government debt ratings have been downgraded in Greece by all three major international agencies, and by some of them in Ireland and Spain as well.
The Fitch agency has urged all governments with top ratings to tame debt, mentioning in particular Britain, which is not a eurozone member, along with France and Spain, which are.
Germany, long considered the cornerstone of eurozone fiscal discipline, forecasts public debt at around 78 percent of GDP this year, while in France, the second-biggest eurozone economy, public debt jumped to a record 75.8 percent in the third quarter of last year.
Greece says its shortfall would come to 120 percent of output this year.
Debt is raising the cost of borrowing for many countries and adding to the weight of reimbursing obligations on future budgets.
With unemployment rising and weak growth expected this year, officials cannot count on increased tax revenues for much help in paying down debt, a lot of which is owed abroad.
“The [economic] crisis is weighing on the sustainability of public finances and potential growth,” the EU commission has warned as economists leave open the possibility of a “double dip” recession.
Finances will be undermined further by an aging population that will need health care in the years to come.
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