Debt-to-GDP ratio: cannot fall without the ECB guaranteeing stable, low-yield debt
The professor. Philipp Heimberger shines a light of Austrian logic on the otherwise empty debate on the new European stability pact, and he does so with an article in Handelsblatt.
In Germany, the Greens, FDP and SPD, an ostensibly progressive coalition, would like the Commission to impose a drop in the Debt-to-GDP ratio on countries, showing how the policy is in any case weak towards the prejudices of individual nations. In the end, the Semaphore behaves like any AfD or CDU in the field of economic policy.
Too bad they turn a blind eye to what it would take to be able to reduce public debt ratios in all euro countries in the long run. The International Monetary Fund recently found that austerity measures usually do not lower the debt-to-GDP ratio because they dampen growth.
The central parameter for the evolution of the debt/GDP ratio is the difference between the average interest rate on government bonds and economic growth. If the interest rate is lower, the debt-to-GDP ratio tends to decrease, even if the state runs a small budget deficit. If it is higher than growth, the debt/GDP ratio continues to grow and it is useless to ask citizens for continuous sacrifices. The government then has to generate surpluses to stabilize itself, but this can weaken the economy.
Heimberger highlights how it is necessary to have a high level of confidence in the safety of government bonds to ensure that the debt-to-GDP ratio decreases.
Southern European countries such as Portugal and Italy were punished in the 2010-2012 euro crisis because the European Central Bank (ECB) failed to credibly back their government bonds.
This was partly due to Germany's opposition to the ECB's stabilization measures. This led to sharp interest rate hikes and pushed these countries into austerity policies that held back growth. The interest-growth differential has significantly deteriorated, the debt-to-GDP ratio has increased.
The ECB is needed for stabilization
The ECB has learned from this. During the Covid-19 crisis, he stabilized markets with bond-buying programs to counter hikes in government bond interest rates. This has helped reduce debt-to-GDP ratios. The German government has benefited from lower interest rates and greater stability in the other euro countries.
All euro countries need confidence in safe government bonds if public debt ratios are to fall in the long run. Allow excessive market movement.
The ECB is needed for stabilization. A joint deposit insurance scheme is also needed. Because if national governments have to bear the costs themselves, any banking difficulties can lead to doubts about the soundness of public finances and growing demands for interest by bondholders. However, this type of guarantee can only be offered by the ECB, which alone can provide this type of guarantee in the necessary scale with almost zero costs and without market disruption.
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The article Debt/GDP ratio: it cannot fall without the ECB guaranteeing a stable and low-yield debt comes from Scenari Economici .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/rapporto-debito-pil-non-puo-calare-senza-che-la-bce-garantisca-un-debito-stabile-e-a-basso-rendimento/ on Tue, 27 Jun 2023 12:00:54 +0000.