Debt gets heavier

BRUSSELS – The European Commission’s decision to propose that governments apply the Stability Pact more strictly with regard to public debt implies a serious risk to Greece. Noting that it has become common knowledge that the fiscal demands of the Stability Pact have to be aligned more adequately with the development ambitions of the strategy outlined in the Lisbon agreement, the Commission has prepared a package of ideas for the so-called «economic governance» of the EU. Regarding Greece, perhaps the most important facet of these ideas is the stricter application of the somewhat forgotten obligation that states keep their public debt below 60 percent of GDP. This concerns especially countries that are showing increased economic development but face risks to their long-term fiscal stability from the demands that an aging population will place on their social security systems. Greece is a prime candidate for this attention. Its public debt, at about 100 percent of GDP, is among the highest in the EU; its growth rate is among the very highest compared to the rest of Europe; while its social security system is among the most vulnerable in the EU. This unfortunate combination, which results (to a great extent) from many years of mismanagement, makes Greece the example of the ills that the Commission wants to correct. The countries that have shown greater foresight in dealing with their public debt are to be allowed greater flexibility in dealing with their deficit (where Greece is also facing difficulties) if this is seen as a temporary straying from the demand for zero deficits and is aimed at achieving structural reforms or giving a boost to economic activity. If this new set of rigid rules is adopted in the next few weeks, as Brussels has signaled, it is certain that Greece will be pressed to accept a timetable for reducing the public debt to under 60 percent within a reasonable time, with all that this entails for economic policy. The understanding is that the government will soon have to show greater determination in dealing with the problem of public finances, something that has always been the Greek economy’s weakest point.