THE REALITY OF PUBLIC DEBT
Most economists are evoking a return to growth to offset the relative importance of public debt, which has exceeded 90% of the Eurozone’s GDP. Some countries have crossed the dreaded frontier of 100%, but without taking into account the weight of debt linked to an ageing population.
The solution of expected growth is too convenient; unfortunately, there will not be any in the short term. The austerity policies implemented in some southern states of the Eurozone have contributed to worsening the recession, so imagining a return to growth seems to me to be more wishful thinking than an operational reality.
Growth is evoked as a throwback to the 1950s and 1960s, a period in which public debt due to the Second World War had been absorbed. This comparison, however, does not hold water: the post-war years were marked by an incredible windfall effect in manufacturing linked to industrial reconstruction under the Marshall Plan, and also full employment, which was the sad end of the human slaughter from 1940-45. This is even more striking when we see that public debt started to shoot up when industrial growth fell apart in the oil crises of the 1970s. As things stand, we have refused to mourn the passing of the thirty glorious years (1945-1975) by passing on the repayment of public debt onto the following generations. We knowingly used the argument of lack of growth to feed a credit-based model in the 1970s. How can we dare to expect growth now we have chosen the path of collective indebtedness?
It is not just the banking crisis that has sent current public debt sky-high but rather the chronic budget deficits of States, activated by economic stabilisers. These feed a budgetary policy that is legitimately counter-cyclical: in a period of recession, tax income drops while social transfers increase.
In fact, the important thing is not to pay off public debt but to stabilise it and finance it within the framework of a fair social and fiscal contract. This involves a correct share-out of the load on workers and investors. This is a very delicate balance to achieve because both work and risky savings are already penalised by heavy taxation.
If the member states of the Eurozone had maintained their national currencies, the monetisation of public debt (i.e. refinancing it by printing money) would probably have been carried out at the cost of devaluation and inflation. This was indeed the solution applied by most European countries, Belgium included, in the 1980s. Unfortunately, the monetisation of debt should now be done at European level. Some countries are fiercely opposed to this because they reject the mutualisation of public debt (Eurobonds), which is, however, the downside of a single currency.
The fear of inflation, systematically evoked by the European Central Bank and the Bundesbank in an effort to fend off the monetisation of public debt, is, however, unfounded. The real danger now is deflation rather than inflation. If the deflation scenario is confirmed, it is precisely a more flexible monetary policy (therefore potentially inflationary) that will impose itself together with a relaxation of budgetary restraint. Both are currently rejected by Germany, which underscores the countries’ inability to reach a homogeneous vision in order to exit the crisis.
If the Eurozone does not move towards the monetisation of its public debt and a more flexible monetary policy, the absorption of public debt surpluses will inevitably have to be done at national level. In the weaker southern countries, this increases the probability of catastrophic consequences, as we have seen in Greece (default) or Cyprus (a drain on private property).
The Euro therefore dilutes the monetary risk of southern countries in difficulties, but it increases the danger that they might have to implement unprecedented solutions to reabsorb their public debt, e.g. default, the consolidation or rescheduling of debts, the nationalisation of financial institutions or straightforward confiscation. These consequences (Belgium will be spared) are now conceivable since in the last two years public debt has ‘migrated’ towards its countries of origin. For example, Italy’s debt is mainly held in Italian banks and insurance companies, and the same applies to Spain.
Excessive nationalisation of public debt is therefore dangerous. It would make the circuits of the banks and insurance companies viscous, but above all dependent on the guardian States. If strong complicity between financial stakeholders and the States is perfectly coherent in the short term, banks and insurance companies cannot be used for too long to channel domestic savings towards the public debt of a country. Indeed, this would affect their development, and above all their natural need to diversify their risks.
In conclusion, the main problem of the Eurozone has to do with the level of public debt as a result of the lack of growth and an extremely heavy tax burden, which is in itself the reflection of a strong nationalisation of the economy. Considerable disagreement within Europe on the creation of money reduces the option to use inflation and imposes austerity policies that even the IMF considers unsuitable.
For rather weird reasons, we give priority to controlling inflation over creating jobs for young people. However, in the absence of growth and inflation, excessive public debt runs the risk of leading to brutal solutions, deleveraging processes and stifling the banking sector under excessive public supervision. In other words, an excessively restrictive monetary and budgetary policy will not only end up strangling the European economy, it will also pervert financial institutions. Moreover, if public debt is not attenuated by inflation, it could lead to an implosion of socio-economic structures.
The financial markets have given a temporary respite to States to apply structural reforms affecting future sources of imbalances in public finances, such as the financing of the cost of an ageing population. The signal given by the markets is precisely not that of austerity, since the States are borrowing at historically low rates, a factor that should encourage them to consolidate their level of public debt.
