The debt burden looks certain to increase again this year and yet more in 2006, putting more pressure on the European Central Bank (ECB) to bolster the credibility of the euro by raising its interest rate.

Every country in the single currency area is meant to keep its national debt below 60 per cent of national income, even though Greece, Belgium and Italy began at above 100 per cent.

Although several countries cut debts in the early years of the euro, so many are now ignoring this rule that their combined government debts rose to 70.8 per cent of the total gross domestic product (GPD) of the single currency area last year, up from 70.4 per cent in 2003.

Budget deficits, which reached the national limit of 3 per cent of GDP across the eurozone in 2003, fell back to an aggregate 2.7 per cent in 2004. Output recovered last year, but grew by only 1.7 per cent. Deficits would have to be no more than two thirds of the rate of growth of output to stop the debt burden rising back towards 75 per cent This year, the eurozone’s economy is expected to expand by only 1.2 to 1.3 per cent, but budget deficits in big member states, particularly Germany and Italy, are going up again.

Joaquin Almunia, the EU Economic Affairs Commissioner, said last week that Germany’s budget gap could widen from an already excessive 3.7 per cent to 4 per cent this year.

The International Monetary Fund expects five eurozone members to break the 3 per cent limit this year and sees Italy’s deficit rising to 5.1 per cent in 2006. However, most forecasters expect eurozone output to grow by 2.0 per cent or less next year.

Spain, the Irish Republic, Austria, Belgium and Luxembourg, most of which enjoy stronger growth, have much healthier finances than the eurozone’s big three, but do not carry sufficient weight to improve the average markedly.

Deficit rates and debt levels are lower for the whole of the EU than for the 12-nation eurozone. In aggregate the 25 member Governments exceeded their income by 2.6 per cent of GDP. Their combined debt added up to 63.4 per cent of GDP.

This means that EU countries that run their own currencies are, on average, well within the debt and deficit limits that members of the eurozone are pledged to keep. This discrepancy is raising fears that key eurozone members hope to be carried along by a credible euro without contributing to the currency’s stability.

At the behest of France, Germany and Italy, enforcement of the budget rules in the Stability and Growth Pact was softened this year. Jean-Claude Trichet, President of the ECB, warned Governments at the time that this would force business to endure needlessly high interest rates. The ECB has since been criticised for keeping rates higher than the stagnation of Germany and Italy might warrant.

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