The Fiscal Conservatism of Central Europeans

People living in Three Seas countries are much less prone to taking loans than citizens of Western European countries. This division is so strong that it goes beyond simple economic choices.

Unrecognizable person's hand holding credit card in front of lap top at home
Photo: iStock.com / filadendron

Debt is the slavery of the free,” used to say Publilius Syrus, a Roman writer and playwright who lived in the first century BC. A valuable remark as it came from the mouth of a man who appreciated the taste of freedom like few others. Publius was born a slave in Antioch (Syria at that time, nowadays Turkey). He was sold to Rome – and only there did he gain freedom in recognition of his talent. His curriculum vitae alone, therefore, makes his remark very credible.

Similar conclusions were reached by thinkers in subsequent eras. “Debts are like children: begot with pleasure, but brought forth with pain,” wrote Moliere, a French playwright living in the XVII century. American commentator Fareed Zakaria elaborated on this in an op-ed for the “Washington Post” in 2011, saying, “In a world awash in debt, power shifts to creditors.”

Debt is just a debt

These few quotes best demonstrate how universal the problem of debt is. Regardless of the era, it represents a similar burden – for individuals, as well as for entire countries. But there was a brief period in the history of the world when it seemed otherwise. At the beginning of the 21st century, theories emerged that debt… is just debt. In the age of globalization, money was supposed to lose its nationality, so the burdens on individual states would not be as destructive to them as before. Low-interest rates radically reduced the cost of servicing debt so that it would no longer be a burden turning free people into slaves and giving power over countries to their creditors.

Some nations have come to believe these incantations about debt and how its economic and political role is changing. This is particularly evident in the southern European countries, whose debt has risen sharply in the XXI century. But also, not all countries of the old continent have followed this path. Central European states, in particular, have debts well below the average for EU countries. What is the consequence of this difference?

No such thing as a cheap loan

General government gross debt (measured as the percentage of GDP) within the euro area has grown significantly. In 2005 debt accounted for 67.1% of the 27 member states’ GDP. Two years later, it even decreased to 62.3%. And from that time it has been only increasing. In 2014 it was 86.9% and reached a record high in 2020 when it accounted for 89.8% of GDP. After that record, it decreased only a little bit. In the second quarter of 2022, it was 86.4%.

But looking more closely at these figures, one can see an apparent disparity. Central European countries generally have lower debt than Western and Southern European countries. The most indebted country in the EU is Greece, with a public debt of 182.1%. It is followed by Italy (150.2%), Portugal (123.4%), Spain (116.1%), France (113.1%), and Belgium (108.3%). On the second end of this axis, we have Estonia, with debt worth 16.7% of its GDP. Next is Bulgaria (21.3%) and Luxembourg (25.4%).

All 12 countries which are members of the Three Seas Initiative are below the EU average. These states remember that in economics, there is no such thing as a cheap loan – to paraphrase Milton Friedman’s famous saying. The second half of 2022, when all major central banks started rapidly increasing interest rates to at least slow the rate of inflationary growth, has only confirmed that a conservative approach to borrowing is a beneficial strategy in the long run.

The difference in approach to debt is a consequence of historical processes. Western and Southern European countries are classified as developed countries. They have been using all the instruments offered by banking for decades, in addition to the fact that their fiscal space is more significant, so they can afford higher levels of debt. For example, the Japanese public debt has excessed 260% of its GDP, and nobody even tries to call this country over-indebted.

A bird in the hand is worth two in the bush

For historical reasons, Central European countries started to take advantage of the possibilities of modern banking tools only at the end of the previous century. Consequently, they have less confidence in the banking sector and less capacity to borrow. But this conservatism in fiscal policy in a situation of economic slowdown and rising interest rates is also proving to be salutary – as the need to settle credit obligations does not place an undue burden on the budgets of the countries in the region.

This fiscal conservatism can be seen not only in the economic policy of CEE countries. The same pattern occurs for households. When comparing the ratio of gross debt to household income, it is easy to find the same apparent difference when the debt levels of different European countries are juxtaposed. Europeans approach personal finance much the same way their national governments approach public budgets.

Data from Eurostat confirm this. The average household debt – calculated as a percentage of their income – in the euro area countries (no data available for all 27 EU countries) is 95.78%. In Germany, which has the biggest economy in UE, it is 88.77%. But in Denmark, the debt-to-income ratio of households amounts to 207.32%. In the Netherlands – to 184.03%. This debt is only a little bit lower in Luxembourg (180.94), Sweden (172.45%), Cyprus (124.68%), and Finland (119.16%). Belgian and French households also have a debt-to-income ratio higher than 100% (106.7% and 103.53%).

A quick glance at Eurostat’s data shows that home budgets in Central European countries are planned instead without checking one’s creditworthiness. Household debt in this region is the lowest among EU countries. For instance, the average debt-to-income ratio of households in Latvia amounts to 29.18%. In Hungary – 35.93%. In Lithuania – 38.09%. A little bit higher, but still below the European average, are Slovenia (41.93%), Croatia (52.21%), Poland (55.79%), Estonia (70.33%) or Slovakia (75.02%).

This juxtaposition makes one thing clear: no matter what type of government a country keeps in power, what economic model is preferred, and no matter what currency is in use (euro or local currency), they are all characterized by the same fiscal conservatism. As old folk wisdom says: a bird in the hand is worth two in the bush. That makes them different from Western European citizens. This division is so strong that it goes beyond simple economic choices; it should be defined in cultural and civilizational terms. And that suggests that this difference will stay longer on the European continent.

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