2024-01-06 14:55:31
Every mortgage borrower in Switzerland must prove that they would be able to survive mortgage interest rates of 5 percent. Why don’t governments have to go through such sustainability tests when they incur debt?
Left-green politicians believe austerity measures and debt and spending brakes are nonsense because states are not companies. They believe that socialism can override mathematical and economic laws. A big mistake.
The EU data from the last four quarters up to mid-2023 (last known detailed figures) were used for the following considerations. The debts of the nineteen euro countries amounted to an average of 12,390 billion euros (37,400 euros per capita), on which 239 billion (720 euros per capita) were paid in interest, which in turn corresponded to an interest rate of 1.9 percent. The current market interest rate for ten-year government bonds is 2.7 percent. Every new debt or rescheduling costs significantly more today.
An interest rate of 5 percent would result in additional interest costs of 381 billion for the nineteen euro countries, which would lead to an increase in government spending by 5 to 6 percent. The interest portion would increase from today’s 3.4 to 8.8 percent of expenses. The expenditure ratio to GDP would rise from 49.5 to 53 percent. The gap between income and expenses would increase to 917 billion, or 14 percent of income. This would have to be covered by revenue increases or savings.
Using the same calculation, France would end up with 61 percent government spending as a percentage of GDP, Greece at 58 percent, Italy at 58 percent, Belgium at 57 percent and Austria at 56 percent. For some countries, interest costs account for more than 10 percent of government spending. Such conditions are intolerable.
The rudimentary calculation of the consequences of an interest rate increase to 5 percent shows that, along with Italy, France is also becoming a problem case for the euro zone, because France’s debt has been growing at an above-average rate for years. Both countries are already chronic deficit countries. They would hardly be able to absorb these additional costs through tax increases or spending cuts. You would have to finance this gap with new debt. There would be an accelerated increase in debt, which would also have to be paid interest. The higher the debt, the higher the interest rate. The EU’s mutualized debts are not included in the national debt, and many EU countries have entered into guarantees for banks and state institutions that are also not listed.
Since 1992, the Maastricht criteria, which relate national debt and deficits to GDP, have been used as indicators of the state’s financial situation. This comparison is flawed because the state does not have the entire GDP. Expenditures including interest and amortization of national debt must be covered by state revenue. The ratio of government debt to government revenue is therefore more meaningful, similar to when a company compares its debts with the sales from which it has to cover the costs and service the debts. In the EU-19 average of those countries that have introduced the euro, this ratio is 191 percent.
The high level of debt represents a particular challenge for the ECB because it limits its scope for action. If the ECB does not raise interest rates to the extent necessary to curb inflation out of consideration for the higher education countries, then it risks permanent inflation or a new surge in inflation. If it raises interest rates to 5 percent, then even some of the large EU countries will fall into the debt trap. They might only pay their interest with new debt.
The euro currency system can therefore neither endure a new surge in inflation nor another economic and financial crisis.
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