The eurozone as a whole has certainly run smaller budget deficits than the US or the UK over the last five years. Whereas the eurozone deficit averaged 4.4 per cent of GDP per year in 2008-12, the UK's was 8.4 per cent and that of the US almost 10 per cent. However, an economy’s budget deficit only says so much about its debt dynamics. The sustainability of a country's fiscal position is less about the size of its budget deficit at a particular point in the economic cycle, and much more about the size of its debt stock, the cost of borrowing and the trend in nominal GDP (that is, economic growth plus inflation). And here the picture becomes less clear.
Why has the ratio of eurozone debt to GDP risen almost as much as in the US, despite the US running a budget deficit of twice the size of the eurozone over this period? One factor is nominal GDP or the 'denominator', which has grown more quickly in the US than in the eurozone, reflecting a much stronger economic recovery. This has contained the expansion of debt to GDP in the US relative to the eurozone, where the expansion of nominal GDP has been much weaker. Nominal GDP in the UK has also risen more rapidly than in the eurozone, although this reflects higher inflation rather than a superior growth performance. Inflation is no panacea, of course. Eventually investors will demand a higher premium to compensate for it. But they are only likely to do so once economic recovery is underway (and other assets become more attractive than government bonds). At that point fiscal deficits should fall rapidly in any case, as tax revenues rise and social transfers fall.
Simon Tilford is chief economist at the Centre for European Reform.