Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

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The European Quagmire

The European Commission’s forecasts are gloomy: a 0.1% decrease of European GDP in 2013 as a 0.4% decrease for the Eurozone. It seems that, one after the other, all the member states are collapsing and get trapped into economical disarray. The European Commission gives more time for France and Netherlands to reduce their deficits, but Slovenia is on the edge of explosion while Cyprus, Spain and Italy are very far from recovering. Europe has become the “Sick Man of the World”.

French public spending reached 57,2% of GDP, the second highest rate in Europe just behind Denmark even though France is forecasted to be ahead in 2014. The Government is spending more than it levies: only 2/3rd of the spending are financed with taxes, the other 1/3 being financed with the debt. It is a very dangerous trend in a country unable to implement the necessary structural reforms and cut spending.

Slovenia should be the next country bailed out. After Greece, Ireland, Portugal and Cyprus, Slovenia is the fifth on the list. The Commission has forecasted for this country a recession of -2% for 2013 and -0.1% for 2014. The banking system is not yet reformed and the private sector seriously indebted. Deficits are high: -5.3% in 2013 and -4.9% in 2014.

Cyprus is sinking: its GDP should contract by 15% between 2013 and 2014. The economic activity is collapsing because of the second largest bank’s bankruptcy, capital control and budgetary consolidation. As a result unemployment should hit 15.5% this year and 17% in 2014. Public deficit should reached 6.5% and 8.4% while the national debt would be as high as 124% of GDP in 2014.

In Italy, three figures summarize new Prime Minister Enrico Letta’s herculean task: economic recession of 1.3% this year, almost a flat growth at 0.7% and a debt above 130% of GDP this year.

Spain is going through its fourth year of recession since domestic consumption has shrinked. Unemployment rate is at 27% this year and should be at 26.4 in 2014. Improvements are not scheduled for long.

The Netherlands are in trouble. Public deficit has reached 3.6% and the unemployment is at its highest in this country with 8.1%. The economic growth is dangerously slowly down with a decrease of 0.8%. This is a hard beginning for the new king’s reign.

How long can this economic situation be sustainable? Investors and markets are questioning Europe’s ability to restore a sustainable economy. And we are questioning the ability of the Commission and any European Governments to restore the economy after having hampering it through taxes and public spending. It is time to dramatically decrease taxation and let the private sector doing its job: making business and money, creating wealth and jobs. That seems to be the only way out for Europe.

Sylvain Charat, Ph.D

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