Euro-Zone Budget Deficit Surges Higher on Government Spending
The Euro-Zone posted a deficit-GDP ratio of 1.9% last year, up from just 0.6% in 2007. At the same time the debt ratio rose to 69.3% of GDP from 66.0% of GDP in the previous year. The deficit-GDP ratio is below the 3% limit laid down in the Maastricht Treaty, but this reflects considerable differences between individual member states. Germany, the largest Euro-Zone country, posted an almost balanced budget and a deficit-GDP ratio of just 0.1%. In Ireland on the other hand the deficit ratio jumped to 7.1% of GDP last year and Greece reported a deficit of 5.0%. Both countries face excessive deficit procedures but the case of Ireland shows that the pact is not sufficiently strict to enforce a buildup of reserves during economic boom times. Ireland pursued an expansive fiscal policy at a time when the economy was already booming and inflation high without having to fear a direct reaction from the ECB and now the government is struggling to keep the budget under control as growth is breaking off. Still markets seem less concerned that this will lead to a breakup of the Euro-Zone than a couple of months ago and Euro-Zone yield spreads, which flared out when the crisis escalated, have started to narrow again.