A Surplus of Ambition: Can Europe Rely on Large Primary Surpluses to Solve its Debt Problem?

50 Pages Posted: 24 Jul 2014

See all articles by Barry Eichengreen

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2014

Abstract

IMF forecasts and the EU's Fiscal Compact foresee Europe's heavily indebted countries running primary budget surpluses of as much as 5 percent of GDP for as long as 10 years in order to maintain debt sustainability and bring their debt/GDP ratios down to the Compact's 60 percent target. We show that primary surpluses this large and persistent are rare. In an extensive sample of high- and middle-income countries there are just 3 (nonoverlapping) episodes where countries ran primary surpluses of at least 5 per cent of GDP for 10 years. Analyzing a less restrictive definition of persistent surplus episodes (primary surpluses averaging at least 3 percent of GDP for 5 years), we find that surplus episodes are more likely when growth is strong, when the current account of the balance of payments is in surplus (savings rates are high), when the debt-to-GDP ratio is high (heightening the urgency of fiscal adjustment), and when the governing party controls all houses of parliament or congress (its bargaining position is strong). Left wing governments, strikingly, are more likely to run large, persistent primary surpluses. In advanced countries, proportional representation electoral systems that give rise to encompassing coalitions are associated with surplus episodes. The point estimates do not provide much encouragement for the view that a country like Italy will be able to run a primary budget surplus as large and persistent as officially projected.

Suggested Citation

Eichengreen, Barry and Panizza, Ugo, A Surplus of Ambition: Can Europe Rely on Large Primary Surpluses to Solve its Debt Problem? (July 2014). NBER Working Paper No. w20316. Available at SSRN: https://ssrn.com/abstract=2471209

Barry Eichengreen (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

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