After Japan, things get more difficult. Italy has one of the highest net debt levels in the G7 but the Eurozone crisis of 2010 to 2015 prompted it to run persistent primary surpluses, which it has consistently achieved. Its debt ratio is also stable. This is not the recipe for a crisis.
The United Kingdom was perhaps excessively praised by the IMF for its fiscal consolidation plans last week. Next week’s Budget is likely to show slippage and Britain has a nasty habit of being an unreliable boyfriend on the deficit, always promising probity without delivering it. It needs to show it can achieve deficit reduction, not just talk about it.
HEADING INTO A WALL
That leaves France and the US. Both have a record of not only promising lower deficits that never arrive but also having high deficits and rapidly rising levels of debt. On the IMF’s latest forecasts, both will exceed Japan’s net debt ratio by 2031, and only Japan has a record of beating IMF predictions.
Politics in both is hostile to the necessary reforms for deficit reduction.
In France, far-right leader Marine Le Pen speaks of responsibility but has opposed the pension age reform that is central to healthier public finances. More centrist politicians cannot pass a budget.
In the US, neither political party sees any benefit in fiscal prudence as an electoral strategy.
The IMF was careful to say that reform was urgent rather than predicting an imminent disaster. But fiscal problems are rather like demographics in being extremely easy to predict apart from the moment the dam breaks.
Among the G7, France and the US are heading into a wall. The consequences will be ugly. We just do not know which country will crash first.
