German institute predicts only Greece and Portugal likely to reduce their debts

debt

Only Greece and Portugal from the European south have a realistic prospect of reducing their public-debt-to-GDP ratio in the next two decades, the German Economic Institute said on Wednesday.

According to a report by the Institut der deutschen Wirtschaft (IW), the debt index in the European South is expect to keep rising, especially in France, Spain and Italy. As IW senior economist Bjorn Kauder notes in the report, Greece may be at a worse starting point in terms of numbers, but "will have good prospects during normal times."

Both Greece and Portugal present noteworthy primary surpluses, while Greece is also benefitting from relatively low interest rates, the German institute says.

Examining the possible further development of government debt ratios in France and the four southern European EU member states Greece, Italy, Portugal and Spain, the report looked at three scenarios developing for the next 20 years.

One continues the values forecast by the IMF for the year 2026. The second and third scenarios are based respectively on the development in the four- and eight-year periods before the onset of the Covid-19 pandemic. The results show that only Portugal and Greece can realistically be expected to reduce their debt ratios in the next two decades.

Both EU Member States have remarkable primary balances. Moreover, the Portuguese economy is developing handsomely while Greece is benefitting from relatively low interest rates.

However, not even Portugal is within reach of reducing its debt to the 60 per cent of GDP envisaged by the Stability and Growth Pact. For France, Italy and Spain, a further increase in debt ratios is to be expected. This is due not least to the weakness of the French and Spanish primary balances, while Italy continues to suffer from a sluggish economy. The sustainability of national budgets thus remains a perennial political and economic challenge – especially in view of the demographic adjustments these countries face.