OREANDA-NEWS. August 8, 2012. If Germany, France or the US tried to join the euro zone today, they would be refused due to the Maastricht criteria. Taking into consideration of Russia's current situation, the reforms are recommended to prevent public debt levels from rising.

Dmitri Zaitsev, Senior partner at Roland Berger Russia and CIS :

"A low level of personal income tax and relatively balanced state budget characterize Russia today. The public debt burden is low in Russia, however, volatility of commodity prices will push the government to consider new ways to meet and increasing social spending obligation. Despite a growing trend toward privatization, the government has not lost control over the largest companies and therefore there is plenty of room to maneuver. Measures in Russia can include a range of long-term investments that, ultimately, will counter current or future expenditure. These include investment in social systems to tackle social inequities, investment in research & development, industrial and agricultural modernization, and other infrastructure improvements".

Roland Berger Strategy Consultants has conducted a multi-country assessment of public debt covering such economic heavyweights as China, France, Russia and the US. Together, they account for 40% of global GDP and a total public debt level of USD 13.95 trillion. The assessment looked at six fields of action for both developed and emerging countries in terms of political and economic compatibility. Whereas developed, highly indebted nations like the US or France must bring their debt levels under control, fast-emerging, less indebted nations like China or Russia must keep a watchful eye on theirs and avoid the mistakes made by their developed counterparts.

Today's world is interconnected, turning local issues into global challenges

Today, a majority of developed countries – including Japan, the UK, Germany, France and the US – do not meet the Maastricht debt and deficit criteria. According to those criteria, a nation wishing to join the euro zone must have public debt below 60% of GDP, and the deficit must be less than 3%. Currently, the euro zone and the US are threatened by debt levels far higher than the 60% ceiling. The public debt level in the US – at 103% of GDP – is higher than its current market value. France, where the public debt stands at 86% of GDP, or Germany with 85%, face a similar debt situation. Spain and Greece are also directly affected: public debt levels exceed 70% of GDP in Spain and 163% in Greece. Both of these countries also have to fight structural unemployment rates of up to 25%.

Another major cost factor is the rising expenditure on social systems due to aging populations. "As long as economic growth rates and the associated increase in fiscal income lag behind public debt interest payments, the problem of structural budget deficits remains unsolved," says Hendrik Bremer, Partner at Roland Berger Strategy Consultants and the company's global expert on public debt. "If these issues remain unsolved, the public debt crisis will only intensify."

Setting a political priority: in France and the US, an intelligent combination of short- and long-term actions is needed to reduce public debt

"Resolving the public debt issue should be the number one political priority in highly indebted nations," says Dmitri Zaitsev, Senior partner at Roland Berger in Russia and CIS, "but the currently preferred actions have their limits." In addition to traditional actions like higher taxation or spending cuts, developed, indebted countries must also look to innovative ways to grow out of debt. These may include investing in projects to accelerate growth and reallocating budgets in favor of innovation, education, infrastructure and efficient social systems to remain competitive. Minor debt inflation with an inflation target of 5-7% is another long-term option. According to the latest study on public debt, this inflation target will also make room for further growth in the years to come.

China and Russia need to spend wisely and learn from the mistakes made in the West

Debt is not an immediate issue for China, with a public debt of 25% of GDP, or Russia with 10%. However, the increased volatility of the global markets and the need for long-term strategies are important factors for both countries. "In both China and Russia, the key challenge is to reform the taxation and spending structure wisely while building infrastructure and creating social welfare, without making the same mistakes as the Western economies," says Charles-Edouard Bouee, President of Roland Berger Asia and Executive Committee Member. But China and Russia must remain vigilant: spending cuts in the US and Europe, for example, will reverberate as reduced demand elsewhere – an effect that will undoubtedly impact public finances.

Public debt is a major concern for more than just the countries immediately affected

The effects of the public debt crisis on the European Union and global financial equilibrium are putting enormous pressure on political and economic leaders. Especially in a year like 2012, in which approximately 60 nations, including China, France, Russia and the US, are undergoing potential changes of political leadership, a considerable gap between economic and political proposals can be observed in today's global dialog on financial recovery. "While economic wisdom contends that far-reaching actions including debt inflation and restructuring are sound options, the political debate has mostly focused on income generation and spending cuts" states Hendrik Bremer. These two actions have short-term effects which, although needed in the political arena, are by no means enough to resolve the public debt issue in most developed countries. The right mix of measures can help resolve the public debt crisis. Whereas left unsolved, interest payments which are currently ranging from 1.5% (Japan) and 2.2% (US) to 5.5% (Greece) of GDP in all major economies will go up. According to Hendrik Bremer "Political and business leaders must bring debt levels under control. If left unchecked, interest payments could reach up to 25% of GDP by 2040, even in developed countries like the US."