Ihe accumulation of major crises, from the oil crashes of the 1970s to the Covid-19 pandemic in 2020, including the financial crisis of 2008, has launched a new long cycle of almost general increase in public debt in the world. While their average level was 30% of the world’s gross domestic product (GDP) around 1970, it reached almost 100% in 2020. France, with a rate of 112% in 2022, is slightly above this average. Today, it is the war in Ukraine and the challenges of climate change that are weighing on public finances, and raising the question of the sustainability of future debts.
Historical experience indeed shows that it is essentially wars that have challenged the financial resilience of States, sometimes to the point of bankruptcy, but not always. In principle, the ordinary expenditure of the State ensures its day-to-day functioning; they are paid for by ordinary resources, that is to say by the income from the various taxes and from the domains of the State. Long-term borrowing, on the other hand, is intended to finance the unexpected, the exceptional.
For it to be subscribed at a reasonable price, it is necessary to obtain the confidence of the investors. The first step towards this objective is the establishment of parliamentary control over public expenditure. The second is the assurance of effective taxation because it is borne by all (more or less), perceived at low cost and high yields thanks to the country’s economic dynamism. The third factor is… victory, otherwise it is the risk of bankruptcy (such as Germany after the two world wars). The fourth is the creation of a central bank responsible for controlling the issuance of money, guaranteeing its value and ensuring the soundness of the financial system as a whole, as a lender of last resort.
Commercial quasi-monopoly
The United Provinces (the present-day Netherlands) and England experienced dizzying increases in their public debts, without ever defaulting. Starting from a level below a few percent of GDP in the United Provinces in 1600 and in England in 1695, they reached more than a century later 150% in the first case (around 1700), and 194% in the second. at the end of the wars against France (after 1815). The sustainability of their debts is due to the system of political and banking control described above, to their domination of world maritime trade and, on this basis, to the creation of a navy ensuring them a virtual commercial monopoly. Thanks to their victories, they become international financial centers (Amsterdam, London) and their currency is globalized. The accumulated wealth enables them to service their debt, which becomes a major financial asset, sought after throughout Europe, and whose reliability guarantees them reduced interest rates.
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