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The austerity pain pursued by a number of European countries led to very little gain in 2012.
Figures Monday from Eurostat, the European Union's statistics office, showed that many of the countries hit hardest by Europe's financial crisis, such as Portugal and Spain, saw their budget deficits increase last year — even though they have pursued strict austerity policies designed to get their public finances back into shape.
Though Europe's combined deficit level fell during the year — largely thanks to Germany swinging into a budget surplus — countries continue to reel from the impact of austerity. The overall debt of the 17 EU countries that use the euro rose from 8.2 trillion euros ($10.7 trillion) to 8.6 trillion euros as the region sank back into recession.
After the European crisis over too much debt broke out in late 2009, the region's governments slashed spending — either to meet conditions for bailout loans, or to reassure jittery bond markets. But austerity has also inflicted severe economic pain. Slashing spending and raising taxes have proved to be less effective at reducing deficits than initially thought — and perhaps counter-productive. As economies shrink, so do their tax revenues, potentially making it harder to close budget gaps.
"The news that the eurozone budget deficit shrank again last year will be hailed as evidence by some that austerity is working," said Ben May, European economist at Capital Economics. "But the fact that most economies' deficits have fallen by less than expected and that the consolidation has coincided with deeper-than-anticipated recessions confirms that the costs have been large."
One of the key economic justifications for austerity is under attack. In 2010, U.S. economists Kenneth Rogoff and Carmen Reinhart wrote a paper arguing that growth slows once a government's debt tops 90 percent of its economic output. Their findings suggested that reducing debt, as Europe's most troubled economies have been pressed to do, could increase growth.
But economists at the University of Massachusetts who studied Rogoff and Reinhart's calculations have pointed to errors and omissions that cast doubt on the idea that high government debt will significantly slow economic growth.
Overall in the eurozone, the deficit dropped in 2012 to around 353 billion euros ($460 billion) from 391 billion the year before. Germany was largely behind the improvement as it swung back into surplus.
As a result, the budget deficit of the whole eurozone fell to 3.7 percent of the region's annual gross domestic product from the previous year's 4.2 percent. Countries in the EU are supposed to keep deficits at or below 3 percent. Nevertheless, overall borrowing in the eurozone is lower than in the U.S., which has a budget deficit of around 7 percent of annual GDP.
In 2012, eurozone debt was worth 90.6 percent of the region's GDP, up from 87.3 percent the year before.
Here's a look at the performance of some of the eurozone countries during 2012:
GREECE — The bailed-out country at the epicenter of the region's debt crisis — it was first bailed out in 2010 and has received up to 270 billion euros in assistance — saw mixed results in 2012. Though the government managed to reduce its annual borrowing to 19.4 billion euros from 19.8 billion the year before, the deficit swelled to 10 percent of GDP from 9.5 percent because of a deepening recession. Even so, the country has lately been winning plaudits for its progress — in 2009, Greece's annual borrowing stood at over 36 billion euros. When not counting the cost of paying interest on its existing debt, the government hopes to post a surplus over the coming year. Public debt fell in 2012 to 156.9 percent of GDP from 170.3 percent, partly because private holders of Greek bonds agreed to a big writedown.
IRELAND — The second euro country to receive a bailout is widely viewed as the poster child of austerity and its performance in 2012 showed further improvements. As well as reducing annual borrowing to 12.5 billion euros from 21.3 billion, Ireland saw its deficit shrink to 7.6 percent of annual GDP against 13.4 percent the year before. Unlike fellow bailout recipients, Ireland has managed to post some economic growth for most of the past three years and is ahead of its target to prune the budget deficit to 3 percent by 2015. In a further sign of its reputational rebound, Ireland has resumed limited auctions of long-term bonds at a relatively low cost and is confident of exiting its bailout program later this year.
PORTUGAL — In spite of winning praise from its international creditors, Portugal's deficit swelled to 6.4 percent of annual GDP from 4.4 percent the year before. However, the 2011 figure was flattered by the transfer of private banks' pension funds to the Treasury, which temporarily improved the balance sheet. In 2012, the government's plan to use 3.1 billion euros from the privatization of airport management company ANA to lower its deficit fell foul of Eurostat, which didn't allow the inclusion of that revenue in the deficit calculation.
SPAIN — In spite of efforts to get a handle on its debts, Spain saw its budget deficit rise to 10.6 percent of GDP in 2012, the highest in the eurozone. It rose from 9.4 percent the year before as the country took 40 billion euros in rescue loans to help its banks. Excluding the rescue funds, Spain says its deficit last year improved to just below 7 percent, but still above the initially pledged target of 6.3 percent.
FRANCE — At first glance, the public finances in Europe's second-biggest economy appear to be in relatively good health — its deficit in 2012 fell to 4.8 percent of annual GDP from 5.3 percent the year before. However, there are growing concerns over the outlook as growth has stalled. The French government originally promised to reduce its deficit to 3 percent this year, bringing it in line with European rules. But slow growth has knocked it off track, and the government has said the deficit will be 3.7 percent. France has a history of overly rosy forecasts, and some say the government's numbers are still too optimistic.
GERMANY — While many of its euro partners are struggling to get a grip on their public finances, Germany has done so and more. In 2012, it posted a budget surplus of 4.1 billion euros, in contrast to the 20.2 billion euros deficit the year before. A number of factors helped, including restrained spending, lower debt servicing costs and falling unemployment, which means less outlays for jobless benefits. But economists said state income was also significantly boosted by so-called "bracket creep" — the failure of the government to move tax rates up along with inflation. That means workers who are increasingly winning pay raises in the country's tight job market are pushed into paying higher rates — and more tax.
Elena Becatoros in Athens, Sarah DiLorenzo in Paris, Ciaran Giles in Madrid, Barry Hatton in Lisbon, David McHugh in Frankfurt, Shawn Pogatchnik in Dublin and Paul Wiseman in Washington contributed to this report.