Tackling Europe's debt crisis
The International Monetary Fund estimates that the crisisinduced net cost of financialsector support provided by G20 countries in 2009 amounted to 1.7 percent of GDP ($905 billion), while discretionary fiscal stimulus amounted to 2 percent of GDP in 2009 and 2010 both. All the eurozone countries, except Luxembourg and Finland, reported fiscal deficits in excess of 3 percent of GDP in 2009, while Greece, Spain and Ireland ran deficits of more than 10 percent. Within a single year, eurozone governments' general debt increased by almost 10 percentage points (78.7 percent of GDP in 2009, compared with 69.3 percent in 2008).
As for Germany, the 2010 federal budget features a record-high deficit of well above 50 billion ($ 66.50 billion). Public-sector debt will surpass 1.7 trillion, approaching 80 percent of GDP. Interest payments, which consume more than 10 percent of Germany's federal budget, will grow along with the mounting debt burden - and even faster if interest rates rise.
Yet the financial crisis and the ensuing recession go only so far toward explaining these high levels of indebtedness. The truth is that many European and G20 countries have lived far beyond their means - including Germany, despite its reputation as a paragon of fiscal rectitude.
Even in good times, governments have for too long been spending more than they received. Perhaps worse, some also spent more than they could easily repay, given their economies' declining long-term growth potential because of the aging of their populations. Such profligacy has led to levels of debt that will become unsustainable if we do not act.
This is why Germany decided in 2009 to enshrine strict fiscal rules in its constitution. The Schuldenbremse, or " debt brake", requires the federal government to run a structural deficit of no more than 0.35 percent of GDP by 2016, while Germany's Lnder ( federal states) will be banned from running structural deficits at all as of 2020. The current federal government will certainly abide by these rules, which implies reducing the structural deficit to about 10 billion by 2016 - a reduction of about 7 billion a year. Welfare benefits account for more than half of Germany's federal spending this year. So there is little choice but to cut welfare spending, at least moderately. But this sort of fiscal consolidation can be achieved only if a majority perceives it as being socially equitable. Recipients of social and corporate welfare alike, as well as civil servants, must share the sacrifice.
Thus, German corporations will have to contribute to fiscal consolidation through reductions in subsidies and additional taxes on major energy companies, airlines, and financial institutions. Similarly, civil servants must forego promised pay increases, and the government is looking for annual savings in the federal armed forces of up to 3 billion through structural reforms. Germany's binding fiscal rules set a positive example for other eurozone countries. But all eurozone governments need to demonstrate their own commitment to fiscal consolidation in order to restore the confidence of markets - and of their own citizens. Recent studies show that once a government's debt burden reaches a threshold perceived to be unsustainable, more debt will only stunt, not stimulate, economic growth.
Greece's debt crisis was a clear warning that European policymakers must not allow public debt to pile up indefinitely. The European Union was right to react decisively to ensure the euro's stability by providing short-term assistance to Greece and establishing the European Financial Stabilization Mechanism. But, while the European Financial Stability Facility is a necessary step toward restoring confidence, the Greek crisis has revealed structural weaknesses of the European Monetary Union's (EMU) fiscal-policy framework that cannot, and should not, be fixed by routinely throwing other countries' money at the problem.
Indeed, I consider the European Financial Stability Facility to be a stopgap measure while we remedy the fundamental shortcomings of the Stability and Growth Pact, whose fiscal rules lack substantive and formal bite both. This is why we need a more effective crisis-prevention and crisis-resolution framework for the eurozone, one that strengthens the pact's preventive and corrective provisions. Sanctions for eurozone countries that seriously infringe EMU rules should take effect more quickly and with less political discretion, and also should be tougher. Germany and France have proposed stricter rules on borrowing and spending, backed by tough, semiautomatic sanctions for governments that do not comply. Countries that repeatedly ignore recommendations for reducing excessive deficits - and those that manipulate official statistics - should have their EU funds frozen and their voting rights suspended.