Tribune. The health crisis and that of 2008 have in common a substantial increase in public debt. In France, between 2008 and 2009, it was more than 11 points of gross domestic product (GDP); from 2019 to 2020, it was over 18 points. Automatic stabilizers and discretionary policies socialize the shock, break recessionary chains and avoid the worst. This socialization is necessary, but it has a counterpart: controlling the public debt.
The mistrust of the financial markets or that of the other Member States of the European Union could trigger a financing crisis, a rise in sovereign interest rates and an austerity policy. This would be conducted only to assure lenders that debt restructuring will not take place. But if lenders fear default, they do not comment on the stability of public finances, the relevance of a strategy of spending, taxation or redistribution. It is a strong threat for democracies to constrain public finance choices for short-term reasons.
Look to the future
In the euro zone, this issue is coupled with the legacy of the Stability and Growth Pact. Its intention was to guarantee, through simple and transparent rules, a framework that depoliticizes the subject. The result will have been simplistic rules, which were considerably complicated after the sovereign debt crisis to find roundabout ways to improve them. But the Stability Pact is not the only problem.
The doctrine of the European Central Bank was built on market discipline – sovereign market rates reveal savers’ judgment on debt sustainability. In a monetary union, this doctrine cannot work since savers flee to the country in the zone which they feel is the safest at the slightest suspicion and their assessment of sustainability is partial (at best). This is why this doctrine was shattered in 2012 when the sovereign debt crisis reached its climax.
We must therefore deal with the issue of public debts and their sustainability in a reasoned manner. This is why the French Observatory of Economic Conjunctures (OFCE) has developed DebtWatch, an online application that simulates savings and their public debt.
The definition of sustainability that we are proposing is not the usual one which consists in lamenting the past increase in debt or the recurrence of deficits. Sustainability must indeed be assessed by looking at the future, however uncertain it may be. The method is therefore to simulate as many changes as possible in the public debt, by varying the economic assumptions. These assumptions can be based on economic theories, or on empirical analyzes. The important point is to assume the uncertainty of the future trajectory of the debt according to future economic mechanisms.
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