SOUTHERN COUNTRIES OF THE EUROPEAN UNION IN A DEBT TRAP: WHAT OPTIONS ARE ON THE TABLE?

This paper analyses the current debt situation of five Southern countries of the eurozone - Spain, France, Greece, Italy, and Portugal. By using values of key debt variables between 1996 and 2016, we show that all the countries, except Italy, are caught in a debt trap. Moreover, Greece and Portugal cannot solely rely on fiscal austerity because they would need to achieve unreasonably high budgetary surpluses in a period longer than 30 years to reduce the excessive debts. Moderate results were shown in the case of France and Spain. Nevertheless, the latter country is suffering from high real interest rates on the government debt which are currently higher than 10%. Moreover, we identified and analysed four main possibilities of dealing with the debts: debt monetization, fiscal consolidation, structural reforms, and sovereign default. The debt monetization as practised by the ECB is not an appropriate solution, its secondary effects are making the situation worse, while its primary effects are based on a short-term perspective. Appropriate fiscal consolidation seems to be based on cutting expenditures. However, the target is not achievable without structural reforms. Some authors claim, that the reforms should be mainly demand-driven, however, we show that this is not the case. Based on historical evidence, the GDP growth does not serve as the main factor of reducing indebtedness. In fact, it was significant in less than 40% of the time in the examined period. Finally, we claim that due to the political motivations, there is a lack of emphasis on real competitive advantages. A return to market principles in many cases is needed, which is in contrast with the usual growth-driven reforms. When there is an insufficient political will to carry out reforms, a proper and fully-executed sovereign default would accelerate functioning of correction mechanisms in the EMU/EU. Unfortunately, such action was not executed in the case of Greece, even though the country has de-facto bankrupted.