2023-12-04 06:59:02
– Should we be afraid of debt?
Developed countries are very indebted, as much as at the end of the Second World War! Is a crisis inevitable?
Published today at 7:59 a.m.
Will developed countries be caught up by their public debt which is reaching peaks, the highest since 1946? Is a major financial crisis inevitable? The discussion is raging among economists, especially since the ecological transition requires heavy investments and Russia’s war of aggression once morest Ukraine is exploding military budgets.
Germany, a lesson-giver, is caught in the trap of a constitutional debt brake that Chancellor Olaf Scholz’s government tried to circumvent by using funds intended for the fight once morest Covid-19 not used to save the climate. The judges of the Federal Court in Karlsruhe disavowed it. No one knows how Olaf Scholz and his coalition bringing together liberals and ecologists will manage to complete a budget for 2024. If many experts believe that the German debt brake is too rigid, its revision is taboo, as it is in Switzerland any idea of increasing the public debt.
With a public debt of less than 30%, Switzerland lives in another world, that of a wealthy household but one that constantly tightens its belt just in case…
But this doctrinal rigidity is absurd. For economists, the debt/GDP (gross domestic product) ratio cannot be assessed absolutely. The proof: Japan which lives with a debt of 160% compared to its GDP while Germany seems paralyzed with a debt of 44% (in comparison, France is close to 100%). With a public debt of less than 30%, Switzerland lives in another world, that of a wealthy household but one that constantly tightens its belt just in case…
Is debt a real problem? “Yes,” answer the economists, “if its growth explodes.” This is particularly the case when the economic growth rate is lower than the average interest rate and the state budget balance is negative. In this case, to finance its expenses, the country will have to increase its borrowing on increasingly unfavorable conditions (level of interest rates). We therefore start from the idea that the debt remains sustainable if the State’s primary balance (before payment of interest) is positive or close to zero. Clearly, a country can go into debt but under fairly specific conditions.
Until now, the European Union applied the rule of a maximum deficit of 3% and a public debt limited to 60% of GDP. These simplistic ratios, imposed by Germany when the euro was created, did not withstand the crises. Also, the Commission has initiated a reform postulating requirements in terms of public debt and deficits which should better take into account economic cycles and the investments necessary for the ecological transition. If the project under consultation seems to be able to rally a majority of countries, many experts believe that we must remove the guarantee funds and subsidies which finance the ecological transition from the debt. The reasoning? Investment gains will be positive over time but require a temporary increase in debt before it stabilizes. Clearly, nothing should stand in the way of debt that improves future prosperity.
So much for the theory. In practice, political leaders have a thousand and one reasons for wanting to increase public debt or deficits to satisfy requests as diverse as they are varied. In theory, debt brakes serve to stop fiscal inflation, but they have become increasingly restrictive for economies with low growth rates and aging populations. Developed states are facing painful choices. They will have to decide: cut spending? Raise the taxes? Delay investments? This last option, attractive in the short term on a political level, would be dramatic, because it is today’s investments that determine tomorrow’s prosperity. The response that Germany adopts for its 2024 budget will be important and closely scrutinized by all governments, including Switzerland, which has elevated the debt brake to the status of a national myth.
Read alsoPierre Or is head of the economics section at 24 Heures, the Tribune de Genève and Le Matin Dimanche. Previously, he was editor-in-chief of the newspaper Le Temps, Agefi and head of the economic section at L’Hebdo. Its areas of expertise are finance, economics, high technologies, environment, climate and agricultural policy. More informations@pierre_or
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