Minerva Lab

The (un)sustainabilityof public debt: the elusive reality of an intuitive concept
di Martin Larch

Governments do not have to balance their budget every year. To achieve their goals, they can and do borrow. In post-WWII history, some EU countries have recorded the largest increase in government debt during times of peace. This trend raises the question of what are the constraints on public finances. While they are easy to define in theory, they do not offer any practical clues. In practice, assessing the sustainability of public debt is like walking in the dark with a small flashlight, trying not to step on mines. When push comes to shove, something has to give: governments will need to cut expenditure or raise taxes, call on the central bank, ask for external help or recur to more extreme measures. In the EU/euro area, severe risks to the sustainability of public debt of member states, especially large ones, can pose a threat to the independence of the central bank and the integrity of the economic and monetary union. Mechanisms to restrain the political bias to accumulate debt yielded mixed results. Member states are polarised, with one camp claiming that sustainability issues arise because there is not enough help from the centre; the other insisting that some countries do not do enough to counter risks at the national level. Both are right and wrong at the same time.

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The (un)sustainabilityof public debt: the elusive reality of an intuitive concept

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