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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

More on the euro zone deficit report

Posted by WARREN MOSLER on April 26th, 2011

Yes, the deficit went from 6.3% to 6% of GDP, but the question remains as to whether they are at the point where further slowing from austerity measures continue to reduce the overall deficit or, instead, an induced slowdown begins to increase it.

Euro Zone 2010 Deficit Shrinks, Debt Rises

April 26 (Reuters) — The euro zone’s aggregated budget deficit fell last year as most countries slashed government spending to restore market confidence in public finances, but the debt still grew, Eurostat data showed.

The European Union’s statistics office said on Tuesday the budget deficit in the euro zone in 2010 was 6.0 percent of gross domestic product, down from 6.3 percent in 2009. Public debt, however, rose to 85.1 percent from 79.3 percent in 2009.

All euro zone countries except Germany, Ireland, Luxembourg and Austria improved their budget balance last year, but debt rose in all euro zone countries except Estonia.

Eurostat said Greece, which was forced to seek emergency funding from the euro zone last year because it was effectively cut off from market borrowing due to its large debt, cut its budget gap to 10.5 percent of GDP from 15.4 percent in 2009.

This is well above the initial target of the Greek austerity programme of 8 percent and even above the latest estimate from the European Union and the International Monetary Fund of 9.6 percent.

Greek public debt rocketed to 142.8 percent of GDP from 127.1 percent in 2009.

Ireland saw its budget deficit more than double to 32.4 percent of GDP last year from 14.3 percent in 2009 and its debt jumped to 96.2 percent from 65.6 percent as the country had to borrow to bail out its banking sector.

3 Responses to “More on the euro zone deficit report”

  1. Ralph Musgrave Says:

    I’m sure how good a grasp I have of the Euro system, but another argument for the 10% per capita Euro distribution strikes me as being as follows. Presumably the EU only supplies Euros to Euro countries via commercial banks because the ECB wants to see those supposedly objective and all-knowing credit rating agencies and commercial banks pass judgement on how risky each country is, and charge a suitable rate of interest. Plus this system means that Euro politicians cannot put pressure on the ECB to let them have money on the cheap.

    But it is now obvious that credit rating agencies and commercial banks are a joke. Plus the ECB is now very much letting PIG countries have money on the cheap in that the ECB is buying PIG bonds. So the ECB might as well cut out the middlemen (the commercial banks) and supply Euros direct to Euro countries. As for pressure on the ECB from Euro politicians, it hopefully wouldn’t be any worse than the verbal warfare between US politicians and the Fed.

    Reply

  2. anarchistas Says:

    Does anybody understand, what euro zone vertical money is, by what rules is emitted, and how can be statistically monitored?

    Good questions of spectacular euro money base dynamics at David Beckworth blog left unanswered.

    My best hypothetical explanation would be like this: “normal” eurosystem settlement mechanisms involve irregular member central banks overdrafts, which in essence is creation of vertical money. In years 2002-2008 part of this intra-system credit seems to be at constant rate offloaded to money base.

    Very possible, the decisions which overdrafts to “monetize” from the beginning and “by design” are the objects of constant political bargaining. Somebody in euro zone has the privilege to carry permanent negative balances. Who?

    Settlement mechanism, briefly explained at FT Alphaville:

    The heart of Europe’s single currency union lies not in some grandiose parliamentary hall in Brussels, but in a little-known payment system platform with the unimpressive title of, “Target2“.

    Just think of two eurozone banks. Imagine, say, Dublin Depository and Berlin Bank.

    Now imagine a deposit shifting from Dublin Depository to Berlin Bank.

    If Berlin doesn’t want to accept payment in the form of a claim on its Irish partner, then the debt is settled via the Irish and German national central banks (NCBs). Dublin Depository makes up for its lost deposit by getting more refinancing from the Central Bank of Ireland (CBI) and Berlin Bank gets a claim on the Bundesbank, recognised as a net fall in the amount of refinancing sought by Berlin Bank, while the Bundesbank acquires a claim on the CBI. (Complicated, yes, but this is Europe).

    We’re paraphrasing John Whittaker here, an economics professor at Lancaster University. And we’re doing it because he’s penned a rather nice angle on the strange eurozone bailout politics of late.

    The thesis: Germany is lending a whopping €325bn to other central banks in the eurosystem.

    And the start of his reasoning is that the CBI’s expanding debt to the eurosystem is a result of what amounts to an Irish bank run. Because of it, Ireland’s banks have had to go to the European Central Bank for liquidity, but they’ve also been tapping that Emergency Lending Assistance (ELA) from their own NCB.

    In fact, Whittaker points out that Germany’s assistance to Ireland through the eurosystem is bigger than its support via the EFSF

    Reply

    WARREN MOSLER Reply:

    The euro zone is like having the US states and the Fed but no Federal govt. and no Treasury.
    It’s more like the US under the original Articles of Confederation, with what may have been very similar results.

    Spending by the European Parliament is part of the vertical component,
    but is very small and gets the euro it’s allowed to spend from the national govts, and doesn’t spend more than it is allocated.

    Each member nation taxes, which creates a nominal demand for euro, but each member nations also spends, supplying what the economy needs to pay the tax.

    And each member nation needs to get euro from taxing or borrowing to be able to spend.

    And the spending of one nation can be used to pay taxes in the others.

    So where does the price level originate? The price setters- those that need to spend the euro the taxpayer need to be able to pay taxes- are in form of competition with each other on many levels. And those who need the funds have those multiple sources.

    And net spending is constrained by market forces and/or the rules of the union, which keeps it all fundamentally in a highly deflationary mode.

    Reply

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