Eurozone debt now equals 90% of economy

In spite of years of harsh spending cuts and tax increases, Europe's debt problems are getting worse.

Figures from the EU's statistics office Wednesday showed that, at the end of the second quarter, the total government debt of the 17 countries that use the single currency was worth 90 per cent of the group's total economic output for the year — the highest level since the euro was launched in 1999.

The rise from the previous quarter's debt to gross domestic product ratio of 88.2 per cent, and the previous year's equivalent of 87.1 per cent, is a result of the eurozone's economic problems — which are making it harder for countries to handle their debts.

"The euro area economy remains stuck in a rut," said James Ashley, senior European economist at RBC Capital Markets.

According to Eurostat five of the countries that use the euro are in recession — Greece, Spain, Italy, Portugal, and Cyprus. Many analysts expect the eurozone to slip back into recession in the third quarter of the year when official figures are published next month. A recession is technically defined as two quarters of negative growth in a row.

Other figures Wednesday pointed to a deepening economic crisis in the eurozone. The purchasing managers' index — a gauge of business activity — from financial information company Markit fell from the previous month's 46.1 to 45.8 in October — its lowest level in more than three years. Any figure below 50 indicates a contraction in activity.

German business confidence slips

Meanwhile, a closely watched survey from the Ifo Institute found business confidence in Germany, Europe's biggest economy, confounded expectations of a modest increase and dropped for the sixth month in a row. Ifo's key figure for October dropped to 100 from 101.4 in September.

Germany has been the main reason why the eurozone has not fallen into recession. The country's powerhouse exporters, such as Volkswagen and BMW, have taken a slice of rising trade volumes around the world while its consumers have shown an increasing appetite to spend. However, the country's economy has recently lost its momentum as the debt troubles on its doorstep have weighed on economic confidence.

A shrinking economy makes the value of a country's debt as a proportion of the size of its economy worse. Over the past year, Italy's debt burden, for example, has risen from 123.7 per cent in the first quarter to 126.1 per cent in the second quarter — that's come while its economy has shrunk for four straight quarters.

Greece's finances, though, are in a league of their own. The country, which is struggling to convince debt inspectors that it's fulfilling pledges it has made in return for billions of euros worth of bailout cash, saw the biggest quarterly increase in its debt burden to 150.3 per cent of national income in the second quarter from 136.9 per cent in the first.

The increase comes despite a dramatic fall in debt in the first quarter after Greece had successfully negotiated a deal with private bondholders to accept a writedown of their Greek holdings. The country's debt was reduced to €280 billion in the first quarter from €341 billion in the second quarter of 2011 as a result of the writedown.

But any advantage gained is slowly being whittled away by the country's deep recession, which appears headed for a sixth year. Interest on the debt, as well as continued budget deficits, pushed the debt back above C300 billion in the second quarter of 2012.

In the second quarter of 2012, the Greek economy was 6.2 per cent smaller than the same period the previous year and all forecasters think the recession will last for a while longer, especially as the country readies to implement even more austerity measures. Lower wages, for example, will impact consumer spending, often a vital ingredient of economic growth.