New Method of Deficit Calculation May Help Struggling European Countries

spain

A change in the way that a key statistic is calculated may make it easier for countries to fulfill austerity measures and other requirements imposed by international organizations, The Wall Street Journal reports.

In exchange for bailout money, several European countries agreed to undergo a series of austerity measures. However, as time has worn on, they have found the benchmarks for the completion of the measures difficult to match, especially given ongoing stagnant conditions in many economies.

One of the key conditions is that the so-called “structural deficit,” or the budget deficit that would exist if a country’s economy was operating at full strength, does not exceed 0.5 percent. This is different from how budget deficits are usually calculated and, in times of recession, it necessarily takes on a lower value than under the normal calculation. The discrepancy lies in exactly how to formulate “structural deficit.”

In countries such as Spain, this can make a huge difference. According to analyst estimates, the Spanish economy is running at nearly full capacity, meaning that its natural rate of unemployment — which is differentiated from cyclical unemployment or other temporary drivers — would still be a whopping 23 percent. Thus, the structural deficit numbers are fairly harsh because the difference between the structural and actual deficits is calculated as being relatively small.

Under the new system, the gap would widen, making it easier for Spain to meet the 0.5 percent threshold required by austerity measures. Though the actual deficit would not change, the structural deficit would be less, implying that the Spanish economy would take on greater potential if it were running at full capacity.

Critics of the change cite nearly full factory capacity and other statistics to illustrate that, at the current point in time, economies such as Greece and Spain are making use of most of their available infrastructure. On the other hand, it is hard to determine just what kind of potential the economies would have if they were not in such a prolonged period of inactivity.

The change comes in the midst of changing attitudes toward austerity measures throughout the world. The IMF recently claimed that some of the austerity measures required in bailouts were too drastic, a problem that the alteration in structural deficit calculation would address. Tension in Ireland erupted into protests in Dublin over a plan that would include major cuts and tax hikes in 2014. Meanwhile, in Germany, many votes feel as if measures have not been strict enough, letting billions of dollars flow from Germany to other eurozone countries with little return value.

In Greece, a massive austerity strike included most teachers and doctors, effectively crippling schools and hospitals. The country is expected to cut thousands of public sector jobs as part of austerity measures required by the terms of their two bailout deals. Struggling countries in the eurozone are increasingly facing the double-edged sword of bailouts. They can’t turn around their economies without assistance, and yet, in order to obtain that assistance, they need to undergo austerity measures that neuter their chances of recovery.

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