EU members’ debt forecasts raise brows

While Greece’s budget shenanigans have been by far the most egregious, it turns out that Athens isn’t the only European capital susceptible to fudging its economic forecasts and offering too few budget-cutting details to downplay the severity of its fiscal problems.

The European Commission, the executive arm of the European Union, admonished the governments of Germany, France, the United Kingdom, Italy and Spain this week for using rosy scenarios to grease the skids toward fiscal prudence.

“The growth assumptions underlying the budgetary projections are assessed as rather optimistic, implying that budgetary outcomes might be worse than targeted,” the commission report concluded.

As a result, it is less likely that these nations will be able to reduce their recession-enhanced budget deficits to 3 percent of gross domestic product (GDP), the EU threshold that governments are expected to meet in normal economic times.

Most countries have committed to meet the deficit goal by 2013 or 2014.

Higher-than-projected budget deficits will cause government debts to rise faster than forecast. Thus, the countries would also fail to make sufficient progress toward reining in their debt-to-GDP ratios.

The EU threshold for debt-to-GDP is 60 percent - a figure most European countries will be well above in 2013 and 2014.

The debt levels of several European countries, including the U.K., France and possibly Germany and Spain, will quickly approach or exceed 90 percent of GDP, a critical level.

For countries with debt-to-GDP ratios “above 90 percent, median growth rates fall by 1 percent and average growth falls considerably more,” according to a recent research paper by economists Ken Rogoff of Harvard and Carmen Reinhart of the University of Maryland.

By comparison, according to a preliminary Congressional Budget Office analysis of President Obama’s 2011 budget blueprint, the U.S. debt-to-GDP ratio would exceed 90 percent in 2020.

The European Commission also chastised several governments for failing to provide sufficient details of the spending restraint they are promising to undertake beyond 2010.

Germany, the largest economy in Europe, saw its budget deficit expand from zero in 2008 to 3.2 percent of GDP in 2009. The 2010 deficit is expected to swell to 5.5 percent.

Helped by “a slightly favorable macroeconomic scenario,” Germany’s deficit will begin falling until it reaches 3 percent in 2013, when the debt-to-GDP ratio is expected to reach 82 percent, well above the 66 percent level in 2008.

“The [German] budgetary strategy is not sufficient to bring the debt ratio back on a downward path,” the commission warned.

The United Kingdom’s debt ratio is expected to soar from 55 percent of GDP in the 2008-09 budget year to 91 percent in 2014-15, largely as a result of budget deficits that are projected to average 11.3 percent of GDP for three years. At 4.7 percent in 2014-15, however, the budget gap will remain far above the 3 percent goal. More ominously, the commission warned that U.K. growth may be “distinctly less favorable than envisaged” throughout the next five years.

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