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European Union (EU) rules limiting the amount of debt member nations can carry and capping the size of their national debts are now “obsolete” in the face of rampant inflation, COVID-related borrowing, and the impact of the Ukraine war and Western sanctions, French finance minister Bruno Le Maire said last week in a Financial Times interview.
Europe is seeing a “new economic model,” he noted, adding that contrasts between frugal nations of northern Europe and highly indebted nations to the south have become irrelevant.
“This concept of ‘frugal states’ has been dead for a long time,” he pointed out. “The Netherlands are not particularly frugal. Germany is not particularly frugal. They spend as much as we do to protect their citizens from inflation.”
Europe needs to make massive investments in renewable energy to meet Paris climate goals and especially as the continent strives to end its dependence on Russian fossil fuels, Le Maire argued.
His views contrast with Christian Lindner, Germany’s finance minister, who said in June that the EU must become “tougher, not softer” in cutting public debt.
Le Maire conceded that limits need to remain on members’ debts and deficit spending but that the current rules—suspended during the COVID War—need to be “rethought,” he said.
The rule limits a member country’s public debt to 60 percent of GDP.
However, Germany’s debt is now 69 percent of its economic output, France’s stands at 113 percent, Italy’s at 151 percent, and Greece’s stands at 193 percent.
“The debt rule is obsolete simply because you have a gap of more than a hundred percentage points between one country and another in the same monetary union,” he pointed out.
Rather than enforcing old rules, the priority now must be to create a pathway for debt reduction, he added.
Investors are increasingly concerned about both the rise in EU countries’ debts as well as the widening spreads of borrowing costs among the nations.
Some observers have voiced concern that the continent might be lurching toward a debt crisis similar to that of 2008, which was marked by high government debt and wide spreads between borrowing costs among countries.
The European Central Bank is drafting a plan to block panic selling of any member country’s bonds.
TREND FORECAST: The harder the coming recession hits, the heavier the debt loads will grow. And, the higher interest rates rise, the more it costs to service the debt.
Also, with the euro trading at 20 year lows against the dollar, the deeper the euro sinks the more it will cost to service the debt. Therefore, a European debt calamity is on the near horizon.