• The growth outlook has deteriorated markedly throughout Euroland with the effects on public finances profound. Through the so-called automatic stabilisers budget balances are highly sensitive to growth and policymakers in most Euroland countries are currently planning various fiscal policy initiatives in order to stimulate growth and employment.
• We estimate that for the whole of Euroland budget balances will deteriorate sharply from a deficit of 0.6% of GDP in 2007 to a deficit of 2.2% of GDP in 2009. Budgets may even worsen further as the last initiative has not yet been unveiled. In addition, uncertainty surrounds both the size and effect of many of the measures already announced.
• Public finances in France are by no means prepared for the marked slowdown in economic activity which we expect. So far France is the only major country whose deficit is expected to exceed the Maastricht Treaty's 3% of GDP threshold. However, we estimate that 2009 budget deficits in both Spain and Italy are close to the 3% threshold with risks that they may worsen further.
• Financial sector support plans first and foremost affect the debt to GDP ratio. The deficit to GDP ratio is only affected in so far as rising debt implies higher interest payments. The precise scale of the rescue plans depends on developments over coming months. Commitments made so far and the maximum amounts guaranteed result in a very broad deficit ratio range. Based on such commitments we estimate total Euroland debt at 66.75% of GDP in 2009, fairly unchanged over 2007. Assuming implementation of the full amount guaranteed the average debt to GDP ratio would increase to 70% of GDP by end 2009.
