Government debt is a burgeoning issue, but the solutions are thus far a damp squib. Despite claims otherwise, the debt crisis is not one that has been solved – not even partially. Recently, European leaders saluted an agreement on settling part of Greece’s outstanding debt– largely by canceling it. Yet, European governments have merely found a way to roll debt over, with debt levels scheduled to increase further, at least until 2016. Interest rates on government bonds should increase correspondingly – hence the rating agencies’ downgrades. Unless we encounter solid growth throughout Europe, we are heading toward further turmoil.
Far from attempting to be pessimistic, I solely seek to reflect on the reality of the situation and what it may entail for the future. What leaders haven’t told us is that when chunks of Greece’s debt are canceled, this means accrued losses for other European national accounts, European banks (and us), paving the way to greater deficits. There is no easy trick; debt will plague the system and tie governments’ hands in the long term. Writing off debt only exists rhetorically and politically. Meanwhile, it has genuine and serious consequences in the real economy.
But public opinion seems to believe Europe is heading in the right direction. European leaders are introducing a blend of austerity packages and measures to boost consumer spending to get out of the slump. In reality, the situation does not offer any short term solutions and Europe has been on a slippery slope for decades. Those in today’s labour market are not the ones who will suffer most from debt.
We, the younger generations, will be. Politicians are mainly concerned with short term gain and re-election and are only beginning to care about debt and sustainability. President Sarkozy recently said it is high-time for the baby boomer generation to assume responsibility for the benefit of their children and grandchildren. National account deficits have soared over the last three decades and increased twofold in many countries in the wake of the financial crisis. To be fair, the credit crunch and the economic crisis which ensued simply helped shed light on an ongoing problem in public finance – excess spending.
Solutions, albeit temporary ones, have been tried. Nonetheless, the situation remains worrisome. If economic growth has indeed arrived, the recovery of national accounts has not materialised, making it more painful. In a recent talk at Oxford’s Saïd Business School, Martin Wolf predicted at least ten years of austerity in Europe.
Governments pay interests on bonds they issue by quarter, semester or year. The cost at which governments borrow – the ‘coupon’ governments will have to pay to creditors – will continue to grow. Yet, governments are forced to continue borrowing to meet their previous commitments and to revamp the economy. They are locked in a downward spiral that can only be broken by spending less and growing more.
Italy is trying to pass far-reaching reforms but may still need a bailout. Spain has already warned it may not live up to its promises, not to mention Portugal. France’s prospects are not merrier, especially if the socialist candidate seizes the presidency in the coming months and enforces his stated anti-economic tax and spending proposals, where debt reduction finds no place.
Eurocrats are discussing a European fiscal policy. This seems like one avenue for the return of some stability on the old continent, but at what cost? How much of their scarce financial resources will European heavyweights need to commit to suffering economies? Will Germany keep rescuing European governments indefinitely?
Alas, debt problems are not restricted to Europe only. Japan is in a mess too. It holds a debt ratio to GDP over 200% (Spain’s is only at 68%). Japan does have a more dynamic economy and an independent central bank, which will surely help the country control inflation, but Rothschild’s Giovanni Ughi reminds us that interest rates are already on the floor and taxes already high! A Japanese default would unsettle neighbouring Asian countries and the rest of the world altogether. Hence, though levels of debt have just entered the public’s radar, they shall undoubtedly become a major concern for all of us.
What state leaders have failed to realise (or admit) is that the debt crisis has just begun. Unless we experience ten years of durable growth, which sounds like wishful thinking, public finance in the developed world seems to be heading into a storm. We still need closer scrutiny over debt, and governments need to apply lessons learned, especially the harsh ones. Unlike the optimism displayed on The Economist magazine’s recent cover page, Europe may not be coming out of the woods, but actually entering the jungle.
Maximilien Berg is an MPhil student at Oxford University.