A new approach to public debt
Should European policy-makers use the “full arsenal of the government balance sheet” to spur a strong and swift recovery, much like the US administration has done? In this commentary Odendahl and Tooze argue that Europe needs a new consensus on public debt. Low public debt can result in a chronic lack of demand which will eventually raise unemployment and lower growth and inflation. Low public debt contributes to the global shortage of safe assets, leaving investors with fewer ways to safely store money in liquid assets. Public sector thrift in Europe not only can lead to financial instability elsewhere but also has political ramifications as it renders Europe dependent on China to provide the demand that keeps European workers in jobs. Currently, eurozone governments in 2019 paid less in annual debt service than they did in 1995, despite higher debt levels. Future increases in interest rates are bound to be the outcome of higher growth.
Using the ECB as a safety valve for public debt will not lead to high inflation, and certainly not hyperinflation. Partial debt monetisation should not be a taboo, but part of any cost-benefit analysis of public debt and the democratic deliberation around it. After all, higher public deficits have benefits, such as protecting people’s incomes through the pandemic or investing in much-needed public goods. Those benefits are the flipside of a small risk of somewhat higher inflation in the future. Europe’s fiscal framework and monetary setup was put together with a different world in mind than the one we live in today. It is high time to adjust that framework, to ensure that Europe can fully and swiftly recover from COVID-19.
Learning to live with debt
By: Christian Odendahl, Adam Tooze – Centre for European Reform, Columbia University
Another proposal for a balanced growth approach
After Blanchard et al. analysis “Redesigning EU Fiscal Rules: From Rules to Standards” Martin and al. propose a different mechanism that would lead to balanced growth without stringent debt and deficit ratios. Three of their recommendations are:
- On the basis of experience with the Recovery and Resilience Facility, gradually set up a permanent European fiscal instrument with a medium-term borrowing capacity backed by own resources. This instrument should be used when facing exceptional situations by financing common initiatives deemed as a priority, or programmes to correct serious economic divergences between Member States.
- Entrust an independent European Fiscal Board (EFB) with defining the methodology for assessing a Member State’s fiscal sustainability and with monitoring its implementation by the independent fiscal institutions.
- Extend the High Council of Public Finance’s mandate to the assessment of fiscal sustainability, to the choice of the underlying macroeconomic scenarios, as well as to the assessment of the adequacy of the debt target.
Reforming the European Fiscal Framework
By: Philippe Martin, Jean Pisani-Ferry, Xavier Ragot – Sciences Po
An interesting historical digression
How did Moscovici laid the groundwork for the EU’s COVID fiscal policy:
I found that politics played a critical role in internal Commission discussions about whether to implement the excessive deficit procedure in Italy, Spain, and Portugal, all of which were technically in breach of the Pact. The ‘Moscos’, as I call them, took for granted that Eurozone rules were contestable at the margins, and they assumed that conflict would occur along intellectual, ideological and partisan lines. Their political work consisted of trying to enlarge the space for agency and, within that space, impose their own views on fiscal policy. These views differed from other actors in the Commission, in the Council, and in the member states, which were much more aligned with a literal interpretation of the Pact. The Moscos did not always win the argument, and when they won it was often because other actors, for their own reasons, pushed in the same direction. But at the end of the day, they succeeded in imposing a flexible interpretation of the Pact that did not please hardliners.
How Jean-Claude Juncker and Pierre Moscovici laid the groundwork for the EU’s post-Covid fiscal policy
By: Frédéric Mérand – Université de Montréal
