Learning to live with debt
At the time of writing, the pandemic is continuing to take a heavy toll on the European economy, and even though an economic collapse has been prevented, Europe’s growth prospects are far from encouraging. Policy-makers across Europe have supported firms, workers and families through furlough schemes, income support and loans – often with remarkable pragmatism – and are continuing to provide new forms of aid. The European recovery fund offers €750 billion in grants and loans to poorer and harder-hit countries. But policy-makers in Europe are reluctant to use the full arsenal of the government balance sheet to spur a full and swift recovery in the way the new US administration is doing, as the fear of higher public debt starts to dominate the European debate (again).
-The Biden administration has passed a massive stimulus bill and has proposed a large investment package. That will put pressure on European governments to commit to more spending too, and beef up the EU’s recovery fund and national investment plans. It will also add fuel to the European debate around public debt and when to start reducing deficits.
-European states can sustain high debts, and have to play the role of insurer for large risks such as the pandemic. Unlike households, states are long-lived, have a fair amount of control over their own revenues and issue bonds that are attractive because they offer safe stores of value for investors.
-But Europe’s consensus on debt and inflation remains relatively hawkish, and assumes that the inflationary forces of the 1970s are still intact – when in fact the world economy has changed dramatically. The effects of ageing, high levels of income and wealth inequality, and of private debt, alongside strong global demand for safe assets, all indicate that aggregate demand and inflation will continue to be weak for the foreseeable future, unless governments act very boldly.
-Europe needs a new consensus that recognises the benefits of higher public debt, such as increased public investment and more safe assets to invest in, and is less obsessive about the potential costs of debt. Low interest rates are most probably here to stay; and faster growth, not austerity is the best way to stabilise public debt.
Nor should that new consensus shy away from debt monetisation as a potential safety valve. -Central banks are public institutions, and can be enlisted to help states fund themselves in times of rising interest rates. The risk of temporarily higher inflation should be seen as part of a cost-benefit analysis, and not something to avoid at all costs.
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Πηγή: cer.eu
