Such debt developments are associated to soaring deficits and interest expenditure, and
resulted in a perverse feedback between higher deficits, higher debt levels, higher interest
expenditure and back to higher deficits, while primary surpluses plummeted (Table 2.8 in
Appendix 2.A).
Already in the second half of the 1970s, the size of the general government deficits in
percentage of GDP were high by international standards in a few EU countries. This was
the case of Belgium, Italy, Ireland and Portugal, which, as shown above, recorded debt
increases until the early nineties. However, in a majority of countries, budget balances
were below the 3% of GDP threshold and in some cases they were close to balance or in
surplus. Deficits soared during the 1980s, and in 1993, in the aftermath of the economic
crisis, only Ireland and Denmark were recording deficits below 3% of GDP. High deficits
were also predominant until the mid-nineties, and it was only after the launching of the
euro when countries were able to rein on deficits. Leaving aside Greece (and Japan) no
country recorded a government deficit above 3% of GDP in 1999. In EMU and
underlying the slowdown in debt reduction, deficits have risen again, especially in
Germany, Greece, France, Italy, Portugal and the UK, although up to lower levels than in
the past, especially than in the first half of the nineties.
A steadily rising debt, combined with high interest rates,2 put pressure on interest
expenditures. In 1977, interest expenditure represented less than 5% of GDP. Only in
Belgium, Italy, Ireland and the UK, countries with debt levels above 50% of GDP, did
interest expenditure represent more than 3½% of GDP. In countries like Spain or Finland,
interest expenditure was almost negligible (less than 1%). However, 15 years later, in no
European country, except in the UK, interest expenditure was below 3% of GDP, and in
the high-debt ones interest expenditure was above (Greece, Italy) or very close to 10% of
GDP (Belgium). Since then, the ratio to GDP of interest expenditure has been on a steady
downward path. This appears unambiguously linked to the stability-oriented economic
policy framework already largely set up in the second stage of EMU (until the late
1990s), characterized by a better control of inflation, which significantly lowered interest
rates in many countries, and a fiscal tightening prompted by the Maastricht criteria and
further enhanced by the SGP, which reduced debt levels. In the most recent years, interest
expenditure has attained levels well below those corresponding to the early nineties and,
in some cases, of the magnitude observed in the late seventies.3
In a majority of countries, primary deficits were contributing to debt accumulation in the
late seventies. Only in France, the Netherlands, the Nordic countries, and the UK
revenues overweighted primary spending. However, in the early nineties, when both
deficits and interest expenditures were at their peaks, a positive reaction of the primary
surplus to debt accumulation seems to be predominant. Only in Spain and France, and the
US, primary surpluses deteriorated while debt was rising.4 With the exception of Portugal
For instance, between 1977 and 1993 the implicit interest rate on government debt (the ratio of
interest expenditure to the stock of debt) had increased from 6.5% to 8% in Belgium, from 6% to
11.5% in Greece, from 2% to 9% in Spain, from 6% to 7.5% in France, from 8% to 10%% in Italy,
or from 4.5% to 10% in Portugal (see Table 2.8 in Appendix 2.A).
In addition, the implicit interest rates on government debt are well below not only those recorded in
the early nineties, but also those recorded at the beginning of the sample period (1977). As a matter
of fact, the implicit interest rates have converged across euro area Member States to around 4.5% in
2005 (see Table 2.8 in Appendix 2.A).
Note that a stronger deterioration was recorded in Finland and Sweden. However, the timing in
Tables 2.1 and 2.8 may not be the most appropriate for these two countries. The bulk of the increase
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