Gripped by public debt
Most economists see renewed economic growth as the way to reduce the relative size of public debt, which now exceeds 90% of Euro zone GDP. Some countries have overshot the critical 100% threshold, not counting the liabilities due to an ageing population.
Hoped for growth would be a convenient solution. Unfortunately, none is forthcoming short term. Austerity policies in certain southern Euro zone countries have meanwhile exacerbated the effects of recession. A return to growth in these circumstances is more wishful thinking than reality.
People assume that growth will be a rerun of the 1950s and 60s when wartime debt was paid down. The analogy is totally wrong: industrial reconstruction, the Marshall Plan and full employment, a sad legacy of the human carnage of 1940-45, in fact created an extraordinary manufacturing windfall effect during the post-war years.
The point becomes even clearer if we remember that public debt started accumulating after industrial growth collapsed after the oil shocks of the 1970s. At the time, we refused to close the chapter on the three boom decades from 1945 to 1975, condemning subsequent generations to repay our public debt. We consciously invoked the argument of insufficient growth to justify a credit-driven economic model. How can we now legitimately expect growth after jeopardising it by our collective indebtedness?
The banking crisis alone has not caused current public debt levels to skyrocket. Chronic government budget deficits triggered by economic stabilisers have clearly been another reason. So-called stabilisers have been activated on the back of justifiably countercyclical fiscal policies, since during recessions, tax revenues fall and social transfers rise.
The main task is not to repay public debt but to stabilise and finance it in a socially and fiscally fair way. Correctly sharing the burden between workers and investors is very tricky to pull off, as labour and risky saving assets are already heavily penalised by tax.
Had the Euro zone member states kept their national currencies, public debt could probably have been monetised (refinancing by printing money) at the price of a devaluation or inflation. That was the recipe applied by most European countries including
The spectre of inflation brandished by the European Central Bank and the Bundesbank to avoid monetising public debt is unfounded. The real hazard now is deflation, not inflation. If deflation takes hold, a potentially inflationary loosening of monetary policy and fiscal constraints will be needed.
If the Euro zone does not monetise public debt and ease monetary policy, each country will inevitably have to pay down excessive public debt on its own. This will increase the probability of catastrophic consequences in the weaker countries, as we saw in
The euro therefore lessens monetary risk for the troubled southern periphery countries but increases the danger of unconventional measures to pay down public debt, e.g. default, debt consolidation and rescheduling, creeping nationalisation of financial institutions, straightforward confiscation.
Outcomes such as these, which Belgium will be spared, are all the more likely as over the past two years public debt has migrated to its country of origin with the result that most Italian debt is now held by Italian banks and insurers, and similarly in Spain.
Excessive nationalisation of public debt is therefore dangerous. It would slow down the transmission circuits of the banks and insurers and above all make these players prisoners of the state which regulates them. A close relationship with government is perfectly acceptable short term. However, banks and insurance companies cannot be exploited as a way of channelling domestic savings into a country’s national debt indefinitely. To do so would harm these players’ development prospects and frustrate their natural need for risk diversification.
In conclusion, the Euro zone's main problems are the level of public indebtedness in the absence of growth and the zone’s extremely heavy tax burden, a symptom of close government involvement in the economy. Profound disagreement at European level over monetary creation rules out inflation and imposes austerity policies which even the IMF acknowledge as inappropriate.
For obscure reasons, inflation control is preferred to youth employment. Without growth or inflation, excessive public debt foreshadows savage debt reduction measures and a banking sector stifled by government control. In short, monetary and fiscal policy that is too restrictive would paralyse the European economy and pervert the financial system. Moreover, socio-economic frameworks could implode if public debt is not alleviated by inflation.
The financial markets are giving governments a breather to allow the introduction of structural reforms aimed at preventing the causes of future public finance overruns, e.g. funding the cost of an ageing population. The markets are not signalling austerity, because governments can borrow at historically cheap levels, which should encourage them
to consolidate public debt.
Translation: George Witherington
