w 109 long-run economic aspects of the european union's eastern ...

LONG-RUN ECONOMIC ASPECTS OF THE EUROPEAN UNION’S EASTERN ENLARGEMENTamounted to almost fourteen per cent of GDP. The German debt to GDP ratio thusincreased by fourteen percentage points more than one could have expected fromthe Germany’s nominally low deficits over this period. The underlying reason wasthat the government kept the Treuhand, the German privatisation agency, offbudget. When this agency had to be unwound, the German government had toassume its debts, which were huge. This is thus a classic case of how an unfinishedtransition can leave large contingent liabilities.Fortunately, however, the Treuhand experience is extremely unlikely to repeatitself. The candidate countries have already largely finished privatisation, so thatany debt accumulation should already have taken place. Moreover, unlike in theformer GDR, wages in the candidate countries are not totally out of line with productivity.This means that privatisation actually yields revenues, not debts, as wasthe case in Germany. (This explains why debt has actually declined.) But are thereother sources of potential government liabilities? The experience of Greece suggeststhat losses of state owned enterprises, which are too politically sensitive tofail, might sooner or later show up in the budget. This might happen either directly,when the enterprises are privatised or re-capitalised, or indirectly via thebanking system, when the government has to pay up for non-performing loans(turning an implicit guarantee into an explicit one).114Table 6.6 shows the debt dynamics in some EU countries prior to their ownmembership in the Euro area. It is apparent that in Germany and all the ‘real ClubMed’ countries (Portugal is only an honorary member of this club) the debt to GDPratio actually increased by more than ten percentage points of GDP during the fiveyears preceding the examination that allowed them to proceed. For the applicantcountries these data are only available for a somewhat shorter period. It is apparentthat these countries had quite a different experience. Many witnessed aconsiderable fall in their debt ratio. In terms of the unexplained part, i.e. the stockflow adjustment, however, there is little difference between the Euro areacountries and the applicants. In both groups there is a tendency for this item to bepositive (implying that there was a source of debt that did not appear in thedeficits), but there are no signs that the applicant countries are worse offenders.