Debt, Germany overtakes Italy (in silence)
The statistical adjustment required by Eurostat shows that the crisis has not spared even the Germans. Factoring in private wealth as well, the level of sustainability is the same as Italy's
By Marco Fortis
On April 26, Eurostat forced Germany to include in the calculation of its public debt the liabilities of the government instrument («bad bank») used to save/nationalize the losses of several ruined private banks. This suddenly shot the German public debt up to 2,079 billion (rather than the 1,885 reported a short time earlier), or 83.2% of the GDP. With that, it surpassed the Italian public debt by a large margin in absolute value, and Italy no longer holds the third largest public debt in the world (at 1,843 billion) as Germany has taken its place. The news did not generate much commentary, and yet, with this new adjustment of accounts, between 2009 and 2010 the public debt of Germany increased at one blow by as much as 319 billion euro: almost the entire stock of the public debt of Greece!
The new statistics published by Eurostat for the four-year period 2007-2010 also make it possible to draw a more accurate comparative balance of the impact of the crisis on public debt. We have examined the cases of 10 economies: the four major European countries, Holland, the U.S. and the so-called PIGS (Portugal, Ireland, Greece and Spain). In the four-year period considered, Italian public debt increased the least in terms of percentage points of the GDP (see graph). Which means that the policy of austerity followed by the Ministry of the Economy, Giulio Tremonti, produced surprisingly good results.
The public debt that increased the most during the period 2007-2010 was Ireland's, followed by those of Greece, the United Kingdom, the U.S., Portugal and Spain. Aside from Greece and Portugal, the costs of the huge private financial crisis had the worst effects on the public debt of those countries that had been riding the real estate "bubble". The Italian economy emerged almost unscathed from the storm: the ratio between its public debt and the GDP increased more due to the decrease in the GDP than to an increase in the debt. Which is still, however, at an uncomfortably high level.
The ratio between GDP and debt is an accounting practice that, however, does not have a strictly theoretical basis, as the debt is a stock and the GDP is a flow. It would be more appropriate to place the debt in relation to the national equity, but this is difficult to do because many countries do not dispose of complete statistics. We know, however, that the net financial wealth of the families, for which we have precise data, is a significant portion of the financial equity of the most advanced European countries. It can therefore be considered a good proxy of the total financial wealth. So we can get a more realistic idea of the sustainability of a public debt by placing it in relation not to the GDP (or not only to it) but also to the net financial wealth of the families (or at least also to that). In which case, after the account adjustment of the German public debt, we find that in relation to its private wealth it is practically equal to that of Italy. We can also see that Greece and Ireland are in serious trouble, because their public debt is even higher than it appears with respect to the GDP, if placed in relation to the wealth.
Eurostat also published a number of other interesting statistics: the final data on the GDP against an equalized purchasing power (Pps) in 2009 and the early data for 2010. These statistics give the impression that Italy «held» substantially during the crisis, also as regards its GDP, in spite of the fact that the data on growth at constant prices indicate that in 2009 the Italian GDP was one of the most hard hit, and in 2010 it was one of those that had the greatest difficulty in recovering. Although the data in Pps are not normally used in historical sequences, the accumulated differences with the sequences at constant prices are wide enough to generate a number of questions. For example, in relative terms, between 2007 and 2010 the volume of the Italian GDP expressed in Pps remained unchanged with respect to the GDP of France and Holland, and was only slightly lower with respect to the GDP of Germany, while it increased in relation to the GDP in almost all the other countries.