The size and composition of government debt in the euro area

This new ECB Occasional Paper is available here.

This paper explains the various concepts of government debt in the euro area with particular emphasis on its size and composition. In terms of size, the paper focuses on different definitions that are in use, in particular the concept of gross general government debt used in the surveillance of the euro area countries, the total liabilities from the government balance sheet approach, and the net debt concept which subtracts government financial assets from the liability side. In addition, it discusses “hidden debt” in the form of implicit and contingent liabilities. In terms of composition, the paper provides information about euro area government debt broken down by maturity, holder or the currency of issue. All these indicators illustrate a sharp increase in government debt in most euro area countries as a result of the crisis. This in turn has several policy implications: (i) the growing government debt ratios need to be stabilised and put on a downward path which improves market confidence; (ii) fiscal surveillance needs to put more emphasis on government debt indicators than in the past; (iii) government financial assets could play a role when analysing solvency issues; (iv) implicit and other off-balance-sheet government liabilities need to be carefully monitored and reported; (v) the gross debt concept should remain the key basis for fiscal surveillance in the EU and for the Excessive Deficit Procedure in particular; (vi) beyond the size of government debt its composition is also a key factor behind public finance vulnerabilities.

29 replies on “The size and composition of government debt in the euro area”

The figures in Table 12 (Increases of ageing-related government expenditure-to-GDP ratio over the period 2007-60) are completely out-of-date for Ireland.
They actually show a higher value for Ireland than Germany. This is bonkers. As the commentary says, these estimates were computed in 2007. At that time, the general assumption was that Ireland’s birth and fertility rates would soon fall to the abysmally low EU average. In fact, exactly the opposite has happened. As Professor Brendan Walsh has highlighted on a number of threads on this site, Ireland’s birth and fertility rates have increased sharply in recent years and are now far and away the highest in the EU. Projections for Ireland’s future population and future population age-structure need to be urgently revised in the light of these developments. I expect the CSO will do that in due course. When they are, the figures in Table 12 of this document will have to be revised also.

Regarding government debt, the document makes the point that some governments hold much greater financial assets than others. It specifically singles Ireland out as one in which government holdings of financial assets have increased the most. I think John Fitzgerald of ESRI made a similar point on here recently. A quick calculation shows that, when financial assets held are taken into account, net government debt in Ireland at end 2010 was 52.9% of GDP, versus an EU average of 50.5%.

Further to my point about the ageing-related expenditure figures in Table 12 being out-of-date, it appears that they come from the following report published in 2009 (which would have used data for several years earlier)

The report sates: “According to the projection, the total fertility rate will increase in all Member States, except Ireland and France where it will fall to 1.85.”

Except that it hasn’t fallen in Ireland since that report was published. Instead it has risen sharply to 2.2 in Q1 of 2011. Even a small difference in the fertility rate can make a massive difference to population projections for so far ahead.

These are the fertility rate figures for all EU countries in 2009.

[01]>IRELAND 2.07
[02] France 2.00
[03] Sweden 1.94
[04] U. Kingdom 1.94
[05] Finland 1.86
[06] Belgium 1.84
[07] Denmark 1.84
[08] Neth’lands 1.79
[09] Estonia 1.62
[10] Luxembourg 1.59
[11] Bulgaria 1.57
[12] Lithuania 1.55
[13] Slovenia 1.53
[14] Greece 1.52
[15] Cyprus 1.51
[16] Czech Rep. 1.49
[17] Malta 1.43
[18] Italy 1.42
[19] Slovakia 1.41
[20] Spain 1.40
[21] Poland 1.40
[22] Austria 1.39
[23] Romania 1.38
[24] Germany 1.36
[25] Portugal 1.32
[26] Hungary 1.32
[27] Latvia 1.31

[ ] EU27 1.60

As I said, Ireland’s figure has since risen to 2.2 in Q1 2011.

It is therefore bonkers to claim (as it does in Table 12) that ageing-related expenditure in Ireland will increase more than in Germany and most other countries up to 2060.

The Euro area financial structure is intensely complicated but perhaps we should recognize it was the lack of Goverment debt that has caused this crisis not too much.

If the stuff was manifest in the economy rather then hidden the banks would be unable to engage in their net negative extraction games and the organic economy could adjust to the new reality without being on the receiving end of abrupt corrupt “surprise” credit shocks every few years.

Any efforts to reduce goverment debt will further increase instability again – if goverments are unable to service the interest on debt – cash / or electronic euros should be produced to spend into the economy.
A control on the velocity & type of spending of this money should prevent high inflation or the almost identical wage deflation.

We will have to accept that credit appears to create a net negative wealth over long time periods – this debt creation was disguised by abundant oil as the depletion of the oil is not recorded until at or near max production.

On the other hand even if money creation had a wealth return of just 1 * 1.1 = 1.1 it would be a good investment as negative creation of money tokens leads to a depreciation & ultimate implosion of societies with huge negative feedback loops as the externalties explode.
However it is much more difficult for spivs to earn a living in this less complex world although I am sure Goldman & the lads will carve out a arbitrage niche somewhere.
Richard Koo has stated that the money return on investment in the depressed Japanese economy was 4 to 1 – we are not Japanese but I am sure we can beat the negative numbers of the credit boom as we now understand the ECB considers credit is money (non default option on credit)
Anyhow in a era when all credit it socialised it is illogical to argue for the non creation of money as the production of 1 euro means you can only lose the maximum of 1 euro while the production of socialised credit means you can loose the leveraged amount.
Just to add – the wholesale & retail cost of fuel in no way quantifies the true value of the stuff in a leveraged monetory world.
Ever since the ending of the slave trade fossil fuels have been the true boiler room of capitalism.
The money leverage in the system disguises the depletion by betting that the end use BTUs will rise year on year.
Without this energy and/or more efficient use of it all modern commerce would stop – it follows that at 10 to 1 leverage its true cost is 10 times the market price – inventions & REAL capital improving endeavours that can beat this entropy.
The commercial banking system has proven itself incapable of generating net wealth for at least 30 years – the argument for reducing leverage is redundent.

sorry that should be end ” the argument for increasing leverage” by not producing money is redundant.


As a keen statistician, you will of course appreciate that Ireland’s Q1 total fertility rate will be revised down when the correct (larger) denominator from the April census is incorporated, no? Q1 release still uses 4.47m for 2010 population.

Listening to a a recent George Soros CNBC interview he stated that the European banking system was the prime exporter of capital in the world – dwarfing both the American & Japanese banking industries.

This would explain Chinas explosive rise & access to capital as the eurosystem was forming in the 1990s & 2000s and rings through with Ajays Chopras assertion that euro banks were reimporting their external investment bets on now dwarfed euro sovergins.
The absurd Euro fiscal debt rules would cause this mutation as banks could not earn enough income from their stunted domestic host economies.

My God what have they done ??????????
Euro Banks have built the Chinese monster with our wallets and Chinese backs.
This is dark , very dark.
The slave trade has never left us it seems.


Congratulations. You are totally correct, of course. It is good to come across someone like yourself who is statistically alert. Very rare on this site.

I think I posted something similar to the point you are making the day the census results were published (all sorts of ‘rates’ will have to be revised down as a result of it, such as birth rate, fertility rate, death rate, road deaths rate, number of TDs per million pop etc etc).

Regarding the fertility rate, the revision would only be of the order of 2-4%, bringing it to around 2.15 and rising, which is still by far the highest in the EU, and still much higher than the assumption made in the EU report I linked to.

But, if it turns out that most of the extra 100k persons revealed by the census are in younger age-groups (which seems likely, although we have to wait and see), the starting-point for the population age-distribution will be more favourable than previously thought from the CSO pre-census population estimates.

Either way, the birth rate and fertility rate figures show that Ireland will be the country in the EU least affected by the demographic timebomb/future pensions crisis. Assuming that Ireland doesn’t go the way of other EU countries and abort its fertility rate down to the EU average, then, by 2050/60, the percentage of the population in Ireland over 65 will still be by far the lowest in the EU. Which won’t, of course, stop George Lee having a tv series designed to show the opposite.

We are in Bangladesh again I take it…………..

But how would a Male MMTer analyze your stats ?

What comes first ? – credit or baby deposits ??????

What a waste of comment space
No no no its wrong, Ireland is not Germany, we’re fertile, fertile I tell you. Repeat x 3
Dork isms…whatever they are. X4

@ Tonicforthetroops

You should try to actually understand what the Dork is going on about. He cuts to the core of the issue.

Besides, does virtual space really exist to be wasted? Now there’s a thought for you. Convert space to money and then you might be on the same wavelength as the Dork.

@ Dork,

A thread you might like about a BIS paper:

Amongst other things, the paper cited states that the savings glut theory was tripe, and that Europe was the prime exporter of capital to the States.

@Disgrunled Observer

Interesting link. No shortage of space in the present universe – which is on a bit of a bubble at the mo. No comment from Lorenzo at all at all at all on ‘dodgy capital flows’ in_an_out o the EuroZone … of course, due to inflation in the Universe the EZ will simply wither away to zero in the fianna_fail sense of the fullness of time … so will we.

STOCKHOLM (AP) — The Royal Swedish Academy of Sciences says Saul Perlmutter and Adam Riess, both American, and Brian Schmidt, a U.S.-Australian citizen, share the 2011 Nobel Prize in physics.

The trio were honored “for the discovery of the accelerating expansion of the universe through observations of distant supernovae.”

Read More:

Ireland may have a birth rate of 2 to 2.2 recently but forecasting is a risky business and forecasting ageing dependency rates a quarter century out is positively dangerous.

If you take into account the Irish experience since 1922 the future would not be rosy on the dependency front. We have for decades at a time experienced a hollowing out of people from 18 to 60 years old due to emigration. Remember 1916 is a popular slogan but remembering 1955 is quite painful and the last few years were not too joyful either.

Thats a cracker of a paper – half way through and will read the rest tommorow
The ICB published a interesting anylasis recently regarding the elasticity of Ireland to things such as American credit events which got no comment which I found surprising.
Anyhow its indisputable that financing comes first & savings follow – i.e the American banking system produces credit , the American consumer buys Chinese Goods , China gets dollars and then may decide to put them in a term like account called treasuries.
China has no control over the reserve currency.
Also it may be best for Ireland in future to lock up these movements into a more stable preserver of wealth – the Irish banking system is just preprogrammed to leverage wealth flows from elsewhere rather then building internal wealth that could be a buffer to future shocks – the best example of this policey is the French nuclear industry in my opinion – unlike German mercantile policey it is a far more redundant and organic wealth shock absorber and as the BIS boys say in a closed system only real capital appreciation creates net wealth

PS I am but a Dork – I am just trying to square the MMT free floating thingy with the Austrian final payment anylasis in my little head.

@ Dork

Thought you might enjoy that. Although, one thing: Brad Setser was utterly convinced that the bulk of Dollars flowing to the states was coming via the eurodollar market in London, so the European figures themselves might be a bit suspect.

As for the ICB analysis, I remember that, but to be honest, didn’t pay any attention myself. It might have been around the time they were obsessing about our corporation tax rate, an idiotic obsession that makes sense only in the context of the euro. How to industrialise when in an inappropriate fixed exchange rate regime and all that. I.e. a trap, just as parity with sterling was a trap. We exported cattle and people on the same boat for Gods sake. Actually, I really do recommend Conor McCabes book Sin’s of the Father. It’s quite succinct and really nails the current state of affairs.

As for how to lock in wealth. I’m not a fan of nuclear to be honest, too many hidden costs (another off balance sheet exercise) and externalities (in a word: Japan), although I’d take another look at it if they started building Thormium reactors. But I understand the point. Like yourself I’d like to see a proper nationwide rail network including commuter rail. I’d also like to see a proper functioning health and education system, and a proper functioning taxation system where both income and wealth is taxed in a progressive manner, and I mean effective, not marginal rates. As MMT’ers frequently point out, a government doesn’t fund itself through taxation, the point is currency monopoly and, (I add this myself), balance. Inequality really doesn’t serve anybody well. With banking confined to a utility function, these basic things would serve to buffer us well.

To the Austrian thing however, I must plead ignorance, and deliberately so. Not to say there’s nothing there, but they turn me off.

Bit of thread … but Taxation does pay debt

‘So how is it that plans for the forthcoming budget don’t feature this? A further €2.75 billion in increased income taxes, which could be a combination of closing off loopholes, tax increases and, ideally, an increase of a few percentage points on people earning over €50,000? It would go a long way to meeting the €3.6 billion target.’

Look on Nuclear as a monetory battery rather then real power for a instance.
They absorb a very high capital cost in their making perhaps during booms and then release it slowly over 50 years as they have a low running cost – even if the investment had only a marginally positive rate of return of 1.1 or just a equal 1 it confers on a economy stability from monetory shocks.
But its the high capital cost & long term nature of such projects which the banks hate – the higher the initial capital cost the less money they can play with in the moment to feed unsustainable consumption.
A Nuclear program during the boom would have prevented at least some of the housing malinvestment as a consequence of these titanic monetory movements.
But I agree its not going to happen in Ireland soon – which is why I am always banging on about the Cork to Blackrock ,Passage west railway.

Anyway getting back to fiscal debt – notice the euro boys always use the flawed GDP metric.
Whats more important in the banking system and indeed the economic system is the ratio of money (goverment debt) to credit.
I think Post Maastricht there has been a major export of European Capital in return for cheap goods & interest / equity income as a result of reducing our goverment debt ratios – even economies such as Germany are not as strong as they appear – there is no longer much substance behind them really.
Now its payback time for people but not banks of course – they can keep their ancient corporate licences.

“Most notably, the Irish government has
underwritten particularly vast guarantees of
some 125% of GDP, including the blanket
guarantee under the Credit Institutions Financial
Support Scheme 23 (CIFS) and the subsequent
eligible liability guarantees”

The French recently made a call for any bank recaps in french banks to be made via ECB printing. We should be demanding that the ECB do the same for us much more forcefully.

The Graph really shows the folly of the (McWilliams Option as John Gormley called it) blanket bank guarantee.
I see Irish data is missing from the last few graphs. Did we not want to participate. The truth can hurt sometimes.

PS : got the jist of Conors book on his Internet site I think – its a really powerful authentic journey down into the dark corners of Ireland.

I am more of a conservative bent then Conor but accept Marxs labour theory of value is a reality withen Ireland and elsewhere.
It needs to be thought in schools but I suspect it is too explosive – better off teaching the proles business org in the leaving.

Cumulative financial sector stabilisation operations and their impact on government
contingent liabilities (2008-10)

Our contingent Liabilities are 5 times higher than any other country.
Greece is 25% of GDP we are 125%
Eamonn Gilmores words on the day of the Guarantee explaining why Labour were against it.
“If This gets called on the country is sunk”

@ Dork

In fairness to leaving cert Bus Org.
I can remember learning about fractional reserve banking. There were even a few paragraphs on Marx and Adam Smith

I can’t – although I accept you are probally right , I am of the late 80s early 90s bus org vintage – maybe the content has changed over the years……….

@ disgruntled observer

Many thanks for that great BIS paper, which nicely fingers the culprits for the unfolding debacle. There is no econonics which is not also a political economics, and no economics which is not also a monetary economics.

The Monetarist, and then neo-Kenyesian, economics establishments have provided ideoligical cover for the biggest act of mass looting ever perpetrated on the globe. It’s clear from this paper that the core EZ banks have been up to their well-oiled necks in it. The CEOs and CFOs exploited the ‘Greenspan put’ to an unimaginable degree.

Given the piratical role played by the City of London, it is incredible that one G Brown should still be entertained as an adviser on economic matters. Money talks. Professional ethics or social responsibility are good for a laff.

As Dork says, it’s an infernal machine for continuous capital destruction and wealth extraction. Our political leaders have no real grasp of the reality they face. We need a breed of political mongeese to seize the credit snakes in our midst before we are all done for.

‘…. the geographical breakdown of capital inflows into the US in the run-up to the crisis is hardly consistent with the ES view. By far the most important source was Europe, not emerging markets. Europe accounted for around one-half of total inflows in 2007. Of this, more than half came from the United Kingdom, a country running a current account deficit, and roughly one-third from the euro area, a region roughly in balance. This amount alone exceeded that from China and by an even larger margin that from Japan, two large surplus economies.

…Global current account imbalances (ie net capital flows) narrowed only slightly in 2008; by contrast, gross capital flows collapsed, driven predominantly by retrenchment in flows between advanced economies. For the US, net capital inflows fell only marginally during 2008, by a mere $20 billion. Over the same period, gross inflows decreased by no less than $1.6 trillion – roughly a 75 percent decline from their 2007 level. Likewise, gross outflows also collapsed. Much of the drop reflected gross flows between the United States and Europe, which reversed abruptly in both directions.

….The consolidated balance sheets highlight the remarkable boom in global banking over the past decade and the prominent role of European banks. Since 2000, the outstanding stock of banks’ foreign claims grew from $10 trillion to a peak of around $34 trillion by end-2007, an expansion that is striking even when scaled by global GDP. European banks accounted for a large fraction of this increase

….And it is the relationship between market interest rates and the unobservable natural rate that underpins credit creation and the availability of external financing in general. In other words, it is monetary policy that ultimately sets the price of leverage in a given currency area. The central bank’s reaction function, describing how market interest rates are set in response to economic developments, is the ultimate
anchor in the monetary regime.

….At a minimum, making progress calls for the adoption of analytical frameworks that stress the externalities involved (Borio (2011a)). This would highlight that no individual country can be safe unless the world as a whole is safe. Such a shift in perspective would be akin to the one that has already occurred in regulation and supervision, from a micro- to a macro-prudential orientation: no individual financial institution can be safe unless the financial system as a whole is safe.

Check out claims on residents of the US – Graph 10

Its shocking,
– Cross border claims
Offshore banks dwarfs all others.

My God the wealth of the world is not being recycled – its a vast vaccum cleaner.
What are they doing with the stuff ?

Re that BIS report

The discussion on the role of shadow banking in the run up to the crisis seems to have fallen into disuse now that social welfare is the root of all evil.

On fertility and ageing (2009) costs projections:

The figures on the cost of ageing in Table 12 are from the 2009 EPC Ageing Report. This exercise is done regularly every 3 years. The new figures will be available most likely in April/March 2012.

Meanwhile, the assumptions (e.g. on fertility) of the new report have been already published by the Commission and are available here:

The new demographic assumptions are taken from the Eurostat’s EUROPOP2010 projection.

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