Big Government Response to European Economic Crisis... Government Spending at 51% of GDP

[Photo by Reuters]

[Asia Economy Reporter Park Byung-hee] As economic crises continue due to COVID-19, the Ukraine war, and other factors, it has been confirmed that European governments are maintaining high levels of spending. European governments are responding to the crisis with a so-called big government approach by increasing expenditures, which is preventing an immediate economic downturn. However, concerns are rising over long-term economic uncertainties such as increasing government debt and inflation.

The Wall Street Journal (WSJ) reported on the 9th (local time), citing the International Monetary Fund (IMF), that the size of eurozone government spending this year is expected to be around 51% of gross domestic product (GDP). This is 4 percentage points higher than in 2019, before the COVID-19 pandemic.

There is a significant gap compared to the United States government. The size of U.S. government spending increased to 45% of GDP in the 2020 fiscal year (October 2019 to September 2020), when the COVID-19 pandemic began, but decreased to 37% in the 2022 fiscal year.

As government spending increases, jobs in Europe are also primarily in the public sector. According to statistics from the European Central Bank (ECB), public sector jobs in the eurozone have increased by 4% since 2019. This contrasts with private sector manufacturing jobs, which decreased by 1%, and service sector jobs, which increased by only 1%. In Spain, public sector jobs increased by about 52,000 in the third quarter, more than twice the increase in private sector jobs during the same period. As of last year, the public sector accounted for about 25% of jobs in the eurozone.

In contrast, private sector jobs are increasing in the United States. According to U.S. Department of Labor statistics, government jobs in the U.S. have decreased by more than 2% since early 2020, while private sector jobs have increased by 1%.

Senior Fellow Jeroen C. Kirkegaard of the Peterson Institute for International Economics, a think tank based in Washington, U.S., said, "Because the U.S. government spent too much during the COVID-19 pandemic, it logically needs to reduce spending now." He added, "Europe restrained government fiscal spending during the 2008 global financial crisis and the subsequent eurozone debt crisis, but it is not doing so now. Although rising interest rates make it more difficult to increase government spending, they are not curbing expenditures."

In fact, recent European governments have promised to expand fiscal spending during successive election campaigns.

French President Emmanuel Macron, who secured re-election in April, announced plans to build a 100% self-sufficient supply chain for electric vehicles, offshore wind power, and solar panel production within five years. Giorgia Meloni, who took office as Italy’s Prime Minister last month, stated that the government deficit would increase to about 4.5% of GDP next year. Italy’s government debt ratio was 135% of GDP in 2019 but has now risen to 150%. German Chancellor Olaf Scholz also revealed a spending plan worth 200 billion euros during his election campaign in June last year.

Currently, European government spending is evaluated as helping to prevent an economic slowdown in Europe. However, concerns are raised that government debt will increase and inflation will worsen in the long term.

The eurozone’s consumer price inflation rate in October reached a record high of 10.7%. In contrast, the U.S. consumer price inflation rate slowed to 8.2% in September. As the ECB raises benchmark interest rates, this is causing conflicts with the government’s expansionary spending policies.

Last month, the IMF urged European countries to reduce government spending to support central banks engaged in the inflation battle. Alfred Kammer, IMF Director for Europe, said, "There is clearly room to support vulnerable groups at a lower cost."

Despite expanded government spending, Europe’s economic recovery and investment recovery are relatively sluggish compared to the United States. When measured in U.S. dollars, the eurozone economy has grown by 4% since 2019, while the U.S. economy has grown by about 17%.

According to JPMorgan Chase, eurozone capital investment increased by 4% last year and is expected to grow by 3% this year. In contrast, U.S. capital investment surged by 10% last year and is expected to increase by 5% this year.

This content was produced with the assistance of AI translation services.