European Union governments are suspended to Greek Prime Minister’s economic plan to save its country from bankruptcy. But what about the public finance states of the rest of the European Union?
First fact:
Government borrowing reflects a fundamental disequilibirum between spending and tax revenue. Borrowing as a % of GDP has been increasing in past few years, despite economic growth.
Second fact:
Present Government borrowing is not to finance investment in the economy. A large percentage of the debt is to finance transfer payments to an ageing population. Paying pensions and health care to an ageing population, will do nothing to facilitate economic growth and higher tax revenues. It will get more and more difficult to finance the national debt.
Third Fact:
As National Debt increases as a % of GDP, it means that the interest payments as a % of GDP increase. Therefore, higher levels of taxes have to be spent on just financing the national debt.
Best bets for a solution:
1. Inflation
A government may be tempted (or forced) to fill the shortfall in revenue by printing money. Printing money and increasing the money supply, will lead to inflation.
Impossible scenario inside the EU: all the governments are depending of the European Central Bank which unique politic is the deflationary one.
2. Unemployment
Social rules and supports in Europe are absorbing the long lasting unemployment in the european countries. It is increasing the public government debt, letting less fresh money for private productive investments. The shift to a new economy is delayed by politic measures of the 20th century.
3. Devaluation of the money.
Other impossible scenario! The weakest countries of the Euro-zone had to bear the weight of a high-valued money with no hope of a support coming from the richest (see case of Grecia).
The bone of contention is therefore the unique money, the Euro. Thanks to the British eurosceptics, UK is out the Euro-zone. Can you imagine the situation of the European Union with UK as one of the big player in the Euro-zone?
Related articles by Zemanta
Zemanta helped me add links & pictures to this email. It can do it for you too.
