Several Eurozone countries are facing what appears to be challenges opposed: reduce debt of the public sector in relation to GDP and, at the same time, increase the productivity. It is not an easy task, but the success of Sweden in the late 1990s could provide a model for a solution based on the application of new budget regulations and the efficient allocation of private savings.
This is what a study by Sylvain Broyer, Chief Economist EMEA of, highlights S&P Global Ratings. The agency will closely monitor national budget debates this autumn, particularly in countries that the European Commission has flagged for excessive deficit procedures, and will closely monitor the process of improving new European tax ruleshoping at the same time for amore efficient allocation of private savingswith particular reference to progress in the use of long-term pension products.
Public debt and productivity
The analyst takes as an example the efforts they are carrying out France, Italy and Belgium to heal their own public finances and increase productivity. “This is not an easy and apparently contradictory task: a recovery in productivity would contribute to fiscal consolidation, but not necessarily the opposite – points out Broyer –. With the financial markets and the European Commission looking for ambitious plansthe three countries could look to the example of another developed economy with abundant private savings that faced the same challenge.”
The Swedish model
The proposed model is that of Sweden that he has halved its public debt to 37.5% of GDP way back in 2007, compared to 69% in 1996, without abandoning its social model and without slowing down growth.
“On the contrary, in these 10 years the average annual growth was maintained at over 3%has not fallen into recession in any year and has recorded a 30% increase in productivity hourly labor and capital intensity,” underlined the S&P analyst.
Among them most important measures introduced by Stockholm in those years, S&P’s analysis focused on the introduction of a three-year cap on expenses nominal central government integrated with a budget surplus target and pension reform that led to the creation of strong pension funds that contributed to an increase in private sector investment equivalent to 4 points of GDP.
S&P’s solution
Not being able to rely on the cyclical economic recovery to restore public finances and restore productivity, European countries must find another solution, taking into account that, in the absence of structural changes, investors domestic and foreign could no longer be willing to ignore the risks associated with burdensome sovereign debts, reducing their ability (or at least their propensity) to invest. This could lead to an increase in countries’ sovereign debt spreads and could force the European Central Bank (ECB) to resume its sovereign debt purchase program.
For the analyst, the solution for the Eurozone countries could therefore lie in the private savings. “Europe has large private savings that could be allocated more efficiently in support of small innovative businesses, with a consequent growth in productivity that would help the region remain atcutting-edge technology. Without interventions – warns the S&P expert – the main European economies could continue to lose market share, compromising global trade, which has been an important source of growth over the last thirty years”.