Red Line For Government Debt

As you will be well aware, the current debate engaging the Continent is that between austerity on the one side and fiscal expansionism on the other. What with the recent election results in France and in Greece (together with German state election returns from North Rhine-Westphalia), there seems to be a rising tide of popular opinion in favor of the former. The austerity party of the EU’s Northern European core, headed by Germany*, has been thrown on the defensive.

And so we have this, from the FAZ, Germany’s paper of record, specifically from that newpaper’s “Sunday economist” blogger Patrick Bernau, warning that Too much debt makes you poor. The lede:

There is a magic boundary: From 90 percent indebtedness it becomes dangerous for States. It is becoming clear: States then often get into decades-long problems.

His authority? That is mainly a recent National Bureau of Economic Research working paper by Carmen and Vincent Reinhart together with Kenneth S. Rogoff, entitled “Debt Overhangs: Past and Present.”

There you go, then: get yourself in debt in excess of 90% of your GDP, and you as a government are asking for trouble. That will show those who seem to just want to borrow-and-spend their way out of current economic difficulties.

In reality, of course, things are not quite so simple. To be fair, Bernau recognizes this. For one thing, that Reinhart^2-Rogoff study has to do with the sorows of States which exceed that 90% limit for five years in a row – a crucial distinction. There’s also the issue of exactly how punishment is delivered to those governments that stray over the line. Supposedly, the interest rates they pay for that debt start to skyrocket but, as Bernau readily concedes, that is hardly the case uniformly in the present world, particularly for governments which in sole charge of their own currency.

What we seem to have here is yet another case of a disconnect between an author’s fair-and-balanced article and those other people who are charged with writing the headline (and, often, the lede). Still, you get the feeling that Bernau does believe in that 90% thesis, even if he doesn’t manage to show in any definitive way why it should be true – and he definitely is worried for his own Germany, whose own government indebtedness is now at 81% of GDP and approaching that “magic boundary” fast.

*But also including the UK, which has been glad both to impose fiscal austerity on itself and live with the inevitably disappointing consequences.

Digg This
Reddit This
Stumble Now!
Buzz This
Vote on DZone
Share on Facebook
Bookmark this on Delicious
Kick It on
Shout it
Share on LinkedIn
Bookmark this on Technorati
Post on Twitter
Google Buzz (aka. Google Reader)

Comments are closed.