Large primary surpluses unlikely to solve Europe’s debt problem

Oct 14, 2015 | News

Large primary surpluses unlikely to solve Europe’s debt problem

Large primary surpluses are unlikely to solve Europe’s debt problem according to Ugo Panizza, Professor of international economics at the Graduate Institute of International and Development Studies, Geneva.

Europe’s heavily indebted countries should run primary budget surpluses of as much as 5% of GDP for as long as 10 years to bring their debt/GDP ratios down from the current levels to the Maastricht Treaty’s objective of 60%. This is not impossible as shown in a study co-authored by Prof. Panizza and Barry Eichengreen, UC, Berkeley.

Their study, based on an unbalanced panel of 54 countries between 1974 and 2013, shows that large (from 3 to 5%) and persistent (from five to ten years) primary surplus episodes are “unusual -15% of the sample- but possible”, says Prof. Panizza. But countries that have run such large surpluses for such extended periods have faced exceptional circumstances.

Sustained surplus episodes are more likely when growth is strong, the current account of the balance of payments is in surplus, the debt-to-GDP ratio is high (heightening the urgency of fiscal adjustment), and the governing party controls all houses of parliament or congress. More generally, a combination of strong institutions and external pressure is required.
“This does not leave one optimistic that Europe’s crisis countries will be able to run primary budget surpluses as large and persistent as projected”, concludes Prof. Panizza.
 
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