Public deficits have a clear influence on the increase of debt; in fact if we sum the last two columns, we obtain roughly the debt variations. More precisely, if we disregard public assets sales and other changes “under the line”, we have to add the GDP decrease multiplied by the debt ratio of previous year. This means that the decrease of GDP has a greater impact in those countries where the debt ratio is higher, like Italy (and, of course, Greece). 
 

On the other hand, if we look at the relation between the drop of GDP and the increase in deficit; it appears that there is not a relationship , and there is a possible explanation in terms of the old Keynesian analysis of automatic and discretionary changes in deficit. If the fall in production is stronger in country A than in B, and if the automatic and discretionary effects are similar, we fill find a positive relation between decrease (-Δ GDP) in income and increase in deficit. But suppose that the two countries have the same fall in production, but A has greater automatic stabilizers and/or decides increase in spending or reduction of taxes: in this case A will have a less strong decrease in income in front of a greater deficit, showing a negative relationship.

There is, of course, another interpretation in terms of an anti-Keynesian point of view, according which deficit spending is ineffective in stimulating the economy, in particular if deficit is brought by an increase in public expenditures. People forecast the future increase in taxes, necessary to balance the greater public expenditures, offsetting it with a decrease in consumption. In this “riparian” view (called also “expectation view” or “German view”) it is a cut in public expenditures that may result the best way to increase the production. To say the truth, from the beginnings of the financial crisis even Germany adopted an increase in deficit of more than three points, starting from a balanced budget in 2008, but at the same time introducing a constitutional law requiring a balanced budget. 
 

The Greek crisis accelerated the return to the orthodox  view of budgetary policy, in a hurry non justified by the behaviour of production; perhaps the so called “piigs countries” may say they are justified by “the attack of financial speculation”, but for all other countries the run to reduce the deficit (and even balance the budget) revels a return of the influence of the orthodox view of fiscal policy; this is clear in particular in the german case; according the new constitutional law in 2006 the public budget should reach the parity (only a 0,35% of deficit will be allowed). In order to obtain this result Germany decided to cut ten billions from now each year, but recently decided for a stronger cut. Even France has adopted a plan with five cumulative points of budget cuts in three years.

 What will be the effect of this simultaneous cut of public deficit by all European countries? If we look at the past experience in the eighties and in the nineties we see that almost everywhere the public debt (as a ratio of GDP) continue to increase for four or five years after the slowdown which happened at the beginnings of the two periods, then it become to diminish. Even Denmark, whose experience in the eighties has been object of several academic studies, starting from a debt of 36,5% in 1980, reached 72,9% in 1984; at that time debt went down to 57,8% in 1990, thank to a good rate of growth of all European countries in the second half of the eighties. Also Sweden starting from 42,3% in 1990 reached 73,8% in 1994 and then debt went down to 52,8% in 2000; again the second half of nineties was a period of good economic growth among European countries.

The simultaneous budgetary cut of all European countries will certainly decrease the economic recovery, which is still very slow, so that the same objective of stopping the increase in public debt will result put in danger. It remains the devaluation of euro and the increase in export towards the USA and Asia, coupled, if the ECB would allow it, with an expansive monetary policy. The Pandora box of budget cuts is open so we have to look for Hope.  

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