Bloomberg
Editorial
November 25, 2011
The European Central Bank, with the support of Germany, is putting immense pressure on euro-area governments to do something about their finances. To that end, it would be helpful if central bankers more clearly defined what they want done.
By refusing to intervene as investor jitters send government borrowing rates to euro-era highs, the ECB has become the primary agent of political change in Europe. In recent days, market pressure has pushed Greece, Italy and Spain to install new governments focused on the painful measures needed to stabilize their debts and make their economies more competitive.
Now France is in the crosshairs. The yield on the government’s 10-year bonds has surged beyond 3.5 percent, from 2.5 percent in September, as investors process a litany of concerns: the effects of slowing growth on France’s yawning budget deficit; the potential costs of bailing out French banks; and the increasing possibility of a euro breakup. To prevail in elections next year, President Nicolas Sarkozy may have to promise more and deeper austerity measures.
No matter what governments do, their efforts may fail without the ECB’s help to support growth and keep borrowing costs down. France pays an average of about 3 percent interest on its debt, according to data from the International Monetary Fund. At that rate, the government would need to get its primary budget deficit (excluding debt-service costs) down to about 0.5 percent of gross domestic product to stabilize its debt burden - - something it has pledged to do by 2013. If France’s borrowing costs rise to 5 percent, and its growth prospects decline by a percentage point, the target would move to a primary surplus of 2 percent of GDP. The difference: about 50 billion euros ($69 billion) a year, or approximately what the French government spends on research and higher education.
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