The numbers on deficit and debt level forecasts for some key eurozone players do not look promising. Last Tuesday, the French Treasury Department announced a 2002 central government deficit of 49.3 billion euros. This number exceeds the official target by 2.5 billion euros and is a long way above the 32 billion euros recorded in 2001. Once other elements - like social security and local spending - are added in, this should run France in with a defiicit level at around 3% for the year. Germany’s budget deficit was above 3.7% in 2002, and despite a major consolidation effort already put in place by Berlin, most commentators expect that the deficit will remain above the 3% mark through 2003. All of which gives gives Morgan Stanley's Vicenzo Guzzo plenty of food for thought since, as he notes, continued hiking of the deficits could "leave the euro area with high deficit (and in some case very high debt) ratios, low growth, apparently widening differences among country performances, and an appreciating currency". Not the most palatable combination to consider, and not too promising for the kind of policy mix it might allow:
If, as we expect, Germany fails to drive its deficit back below the 3% mark, other governments would soon start questioning the rationale behind their own consolidation efforts. In an environment of deteriorated initial conditions and protracted economic weakness, we think that France would let its deficit slip temporarily above 3% in 2003, confident that, once growth is back, fiscal virtue could easily be restored. Italy would probably follow suit. In this case, we do not see the 3% line being breached, but the amount of one-off measures recently adopted suggests that a truly structural measure of the budget deficit is in fact on a steeply ascending trajectory.
Some could argue that a bit of flexibility is welcome and, if any, should have come at an earlier stage. We would tackle this issue from a different angle. Basically, we are saying that in early 2004 Germany and France could be under the Excessive Deficit Procedure and Italy could keep playing with the fire of its cavernous debt. With growth expected to recover barely to trend, any substantial improvement would have to come again at the cost of further fiscal restrictions. But the major economies in the continent by that time would have moved further on along their political cycles, and the chances of significant corrections are slim. This would leave the euro area with high deficit (and in some case very high debt) ratios, low growth, apparently widening differences among country performances, and an appreciating currency.
Source: Morgan Stanley Global Economic Forum