ECONOMY

As Eurozone Economy Shrinks, Govt Debt Loads Grow

David McHugh

Europe's government debt crisis won't end until the region's economy starts growing strongly again, and that will be a while. The Eurozone’s economy has shrunk for two straight quarters, and analysts forecast little or no growth until 2014.

Without growth, there won't be enough tax revenue to help countries like Greece, Italy, Spain and Portugal narrow their deficits and slow the expansion of their debts. Their debt burdens as a percentage of economic output, a key measure of fiscal health, look worse by the day.

The Eurozone's combined debts are equal to about 93% of the region's GDP this year and that figure is forecast to peak at 94.5% next year. In 2009, the Eurozone's debt-to-GDP ratio was 80%. A ratio above 90% is generally considered high and can put pressure on governments' borrowing costs.

The ECB has said it will buy unlimited amounts of government bonds issued by countries struggling to pay their debts, but stemming the crisis and heading off a default by one or more countries aren't the same as stimulating growth. The US economy remains weak, several years after actions by the Fed helped arrest its financial crisis.

Europe's economy is being held back for several reasons: Austerity; shaky banks; reluctant consumers; and anti-business regulation.

European governments are slowly trying to make their economies more competitive, but Greece, Portugal, Spain and Italy have rigid labour markets and limited access to financing.

Data shows that for the second straight quarter the Eurozone economy contracted. Without growth, there's little chance of cutting into an 11.6% jobless rate, the highest since the euro was introduced in 1999. Unemployment tops 25% in Greece and Spain.

Even with a modest recovery in late 2013 and 2014, the Eurozone economy will be smaller than it was in 2008, when the Great Recession reverberated around the world.

source: businessweek