The Paris Club, formed by the world’s richest creditors, is now a group battling heavy public indebtedness. An International Monitory Fund (IMF) report on world economic and financial survey says, “The debt increase is largest in Britain and the United States, two countries strongly affected by the crisis, but is also significant in countries where growth prospects are weaker, such as Japan and some advanced European economies.”
Britain:
According to fiscal prediction published by the IMF, Britain’s deficit will be the highest among the Paris Club. The present government faces a deficit of £163 billion (USD 235 billion) in 2009-10, that is, 11.6% of the national income - the highest since the Second World War.
The newly elected government is heading towards austerity. George Osborne, the conservative Chancellor of Exchequer, said that the austerity measures worth £6 billion for 2010-11, would be helpful. As for the other £157 billion, they will go for an ‘emergency’ budget, preceded by a report from the new Office for Budget Responsibility. The OBR is widely expected to paint a bleaker picture than the previous fiscal projections. Among the other European nations, Spain closely follows Britain.
Spain:
The large real estate debt of Spanish banks raised fears about a new crisis. If foreign investors walk away from Spanish bonds, it could cause a sovereign debt crisis for Spain that could spread to the rest of Europe. The present government budget deficit is 10.4% of the national income. To tackle this, the government has decided to cut down €15 billion (USD 18 billion) over two years. Other Euro-zone leaders, anxious to avert a Spanish debt crisis, welcomed it because Spain’s economy, accounting for 12% of the Euro- zone, is four times bigger than that of Greece. Despite austerity measures, the growth rate might slow down from 1.8% last year to 1.3% this year.
France:
Though the IMF head in France said that there was no risk for France and Germany, the reality is different. French public finance is more tilted towards Greece than to Germany. Though the economy has weathered the recession well with growth in four quarters in a row, the budget deficit for this year is expected to be around 8.2%. The public debt (84% of GDP in 2010), though not as bad as that of Greece (133% of GDP in 2010), is worse than Germany's (76.7% the GDP in 2010 ).
France too has adopted austerity measures to lower the deficit by betting on GDP growth, which it thinks will reach 2.5% from 2011, to get the deficit below 3% of GDP by 2013.
Germany:
Germany is the only European country in a better position. The country’s budget deficit is only 5.7%, much less than of the other members of the Club. In the first quarter of 2010, it found a .02% increase in the GDP. According to the Federal Statistics Office, the reason is investment in farm equipments, exports, shrinking construction and private consumption.
Japan:
The Japanese crisis is, of course, different from that in Greece and the rest of Europe. Declining savings rate and the devaluation of the currency resulted in the recent slump.
Last year, about a quarter of Japan's entire government budget was spent on just servicing existing debt. This year’s budget (9.8% budget deficit in 2010) is the first where more than half of the money has been raised by issuing new debt — in the form of government bonds — to make up the shortfall in tax revenue. Japan’s sovereign debt now amounts to about 200% of Japan's GDP, while the figure for Greece is 133 %.
According to a report by Switzerland’s IMD business school, it will take Japan until 2084 to bring its debt down to a manageable 60% of GDP level; Greece will need until 2031, and the US until 2033.
USA:
According to Joseph Stiglitz, Professor of Columbia University, the US debt is different from other countries’ debt because the country promises to pay through dollar which it controls. Therefore, it will always meet the debt obligations. The question is the value of the dollar.
He said that the growth in the US would slow down significantly at the end of 2010. Whether or not it will slide all the way down in the negative territory is uncertain, though there is an increasing possibility that it will.
The US is already struggling with 11% deficit budget (USD 1.56 trillion in fiscal year 2010) including debt problems. The present government deficit has been 11%, only next to Britain’s. The budget forecasts that its public debt would be 71% of GDP by 2013 and will exceed 80% by 2020.
The Way Ahead
Now the question is How to get out of the crisis? Or, at least what measures can be taken to lessen its impact? Most of the European countries of the Paris Club are cost cutting and trying to manage huge public indebtedness.
But the policy, according to Joseph Stiglitz, is wrong. He feels, “That will lead to lower tax and the reduction in deficits will be much smaller than hoped. It’s a kind of austerity, which failed in Argentina... If Europe and probably the US go on austerity packages that the financial community is pushing for, the likelihood is even greater.” He has proposed debt redistributing like in Brazil and Argentina. Brazil had a debt crisis, which was helped over by liquidity. “Most of the countries are, I think, in the Brazilian situation. If the interest rate remains relatively low and market remains calm, then they won’t have any difficulties,” he said.
Copyright@ Business Economics June 16-31 2010 page 10-11
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