The vicious circle of productivity and fiscal deficit in the euro zone

Labour productivity in the euro zone has been falling slightly since 201 8 . If productivity gains had remained on the previous trend ( 1 % per year from 2012 to 201 7 ), real GDP would be 8 percentage po ints higher at the end of 2023. Moreover, the euro zone has maintained strict fiscal rules. Although it is said that public debt ratios and fiscal deficits will be reduced in a “growth-friendly” way that protects reforms and investment, these rules will require that, within four or seven years (if there are structural reforms that improve debt sustainability and growth), public debt is reduced and fiscal deficits fall below 3% of GDP. Given the lack of productivity gains since 201 8 in the euro zone, and given these fiscal rules, there is reason to fear that a vicious circle may emerge in the euro zone: Insufficient public investment and public spending to boost growth (education, research, etc.); Leading to a chronic decline in labour productivity; Leading to higher public debt and fiscal deficits; Leading to a further reduction in public investment and public spending in order to comply with the fiscal rules.