The euro area aggregate debt ratio is estimated to have peaked in 2014 at 94.5% of GDP, up from 68.5% in 2007. Only five of the 19 euro area countries are expected to have recorded debt ratios below the 60% of GDP reference value in 2015....ECB

04/05/2016                                        Publications

Government debt reduction strategies in the euro area 

This article analyses the economic and institutional factors supporting the reduction of government debt-to-GDP ratios from high levels in the euro area. To this end, it reviews past debt reduction episodes and assesses – as an example of an operationalised government debt reduction strategy – the debt rule enshrined in the reformed Stability and Growth Pact (SGP).

 1 Introduction

 Many euro area countries did not take advantage of the favourable economic conditions prior to the crisis to build up fiscal buffers for future downturns. This contributed to a rapid increase of government debt to high levels after the outbreak of the crisis. There is widespread recognition that high government debt renders countries vulnerable to economic shocks and may hamper growth in a number of ways. Reducing persistently high levels of government debt thus remains one of the main economic policy objectives. As a major lesson from the crisis, in 2011 the EU’s fiscal governance framework was therefore strengthened, including by the introduction of a debt rule. This rule operationalises the Maastricht Treaty’s debt criterion under the SGP, which had effectively not been implemented until then. 

The SGP’s debt rule is a constraining factor mostly for countries with very high levels of government debt. In the light of low growth and inflation, some of these countries have recently faced difficulties in delivering the fiscal adjustment required to put debt on the appropriate downward path, despite the declining burden of interest payments. Against this background, this article reviews the experience with past debt reduction episodes and assesses the SGP’s debt rule as an example of an operationalised government debt reduction strategy. 

The article is structured as follows. Section 2 reflects on the merits of reducing high government debt ratios and considers the main factors underlying recent successful debt reduction episodes. Section 3 first reviews the rise in government debt ratios to high levels during the crisis, before turning to the SGP’s debt rule and its enforcement as an example of an operationalised debt reduction strategy. Section 4 provides some conclusions.

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