Public Debt In The Eurozone: A Political Problem

Thomas Fazi

The question of public debt is once again making headlines across Europe, most notably in Italy and Greece. Yet, public debt is not among the most pressing issues facing the EU and Eurozone (with the possible exception of Greece), at least from a financial-economic standpoint. Moreover, when talking of “the problem of public debt” or the “debt crisis”, we have to be careful because there is the risk of fuelling dangerous and destructive myths. It implies that the main problem facing Greece and other periphery countries was and is the “excessive” level of public debt itself (in turn caused, it is implied, by excessive social welfare spending).

This was not true for most countries – apart possibly from Greece – back in 2009-10 and it is not true today. In fact, before the financial crisis of 2007-09, some of the periphery countries hit the hardest – Spain, Ireland, to a certain degree even Portugal – had among the lowest deficit/debt levels in Europe. The two periphery countries that could be said to have a relatively “high” public debt pre-crisis (according to the totally arbitrary criteria of the Maastricht Treaty) were Italy and Greece. But in both cases it had been hovering stably at around 100 per cent in the years before. It was only with the financial crisis that the deficit and public debt soared as governments stepped in to bail out their overly indebted banks. Overall, by 2010, the average public deficit in the eurozone had jumped from 0.7 per cent to 6 per cent; while the euro area’s overall public debt had gone from 66 to 85 per cent.

Ultimately, in most countries, the crisis was caused by a build-up of private – not public – debt; in all cases, including those where public debt rose, this can be attributed to the massive increase in cross-border capital flows following the introduction of the euro (which in turn led to equally massive intra-European current account imbalances), as acknowledged even by the vice-president of the ECB Vítor Constâncio. So it is important to acknowledge the structural causes of the debt build-up: these can all be traced back to the creation and faulty architecture of the monetary union.

That said, insofar as most countries today do indeed register relatively high levels of public debt, is that a problem? From a technical standpoint, no. This was proven very eloquently in the summer of 2012, when – after three years of incessant psychological terrorism about the need for high-debt countries to implement harsh reforms and austerity measures, and (in most cases) accept the onerous terms of various bailout packages, all this to “reassure the markets” and reduce the debt – Mario Draghi put an end to the “debt crisis” overnight simply by saying that he was “ready to do anything it takes to preserve the euro”. Draghi’s message to financial markets was clear: if they continued to demand excessively high interest rates, the ECB would step in and buy the bonds itself.

This did not go as far as transforming the ECB into a “normal” central bank – far from it – but it was a telling reminder of the fact that public debt is never a problem so long as it is guaranteed by the central bank that issues the currency in which the debt is denominated. We have countless examples of this around the world. Moreover, it showed that it is the central bank that sets interest rates, not the markets. It also made clear that Europe’s “debt crisis” over the 2009-12 period was the result of the dysfunctional architecture of the eurozone – where governments borrow in what is effectively a foreign currency, i.e., a currency that they don’t control – not the debt itself. Finally, it showed that the allegedly “painful but necessary” policies imposed on countries were absolutely unnecessary and counterproductive with regard to reducing the debt, which has grown exponentially precisely as a result of these policies (due to the collapse in GDP) – and were in fact politically and ideologically motivated class-based decisions. All the pain could simply have been avoided.

So is Europe facing a “debt crisis” today? From a financial standpoint, no: thanks in part to the ECB’s quantitative easing (QE) programme, interest rates on ten-year government bonds are relatively low across the Eurozone, despite a small uptick in recent months. However, the main political issue remains unresolved: the ability of euro area countries to service their debt essentially depends on the “good will” of a central bank not subject to any form of democratic accountability or control. Thus, debt appears to be under control; at any moment, however, the ECB could bring the QE programme to an end, reduce the volume of bond acquisitions of any given country or even exclude one from the programme, pushing it back into the jaws of the financial markets. From a popular-democratic standpoint, this situation is unacceptable.

It is unparalleled anywhere else in the world. In “normal” countries – that is, advanced countries that control their currency – there is a strict operational (if not political) relationship between the central bank and the government, where the former tends to support the decisions made by the fiscal authorities. There, public debt is almost never a problem. We have the example of Japan: even though the country has the highest debt-to-GDP ratio in the world (close to 230 per cent), the central bank in recent years has effectively written off a huge chunk of the debt – more than 40 per cent of the country’s public debt has now been permanently buried in the Bank of Japan’s balance sheet – and has just announced that it will keep interest rates on government securities at zero for the foreseeable future, to reduce the government’s interest burden and help it pursue more expansionary fiscal policies. And guess what? The country is close to full employment. So much for the problem of excessive public debt.

This is the opposite of what happens in the Eurozone, where the central bank essentially tells governments: we will help you service the debt but only if you agree to implement austerity and forego any form of expansionary fiscal policy. This goes to the heart of the problem: public debt in the Eurozone is a political tool – a disciplining tool – used to get governments to implement socially harmful policies (and to get citizens to accept these policies by portraying them as inevitable). We saw this at play in Italy, in 2011, when the ECB effectively used its monopoly currency-issuing powers to pressure a democratically elected government into resigning. And, of course, we saw it in Greece during the infamous summer of 2015, when the ECB paralysed the country’s banking system by cutting off its banks’ access to central bank liquidity.

Greece exemplifies the political use of debt in the Eurozone: as long as the troika disburses the latest bailout trance, the country does not face serious repayment issues for many years to come. So – assuming the troika disburses the money, as is likely – even in Greece the debt does not raise pressing financial problems, though the country would of course benefit from lower interest rates. It does, however, raise serious political issues: Greece is to all intents and purposes a debt colony, whose financial survival depends entirely on decisions made by its creditors. This explains why Europe continues to refuse to seriously consider any form of debt relief for Greece, despite the various commitments and promises to that end made in recent years: debt is the chain that keeps Greece from straying “off course”.

Europe does not, then, face a debt problem; it faces a Euro problem. Certainly, there are many measures that technically could be undertaken at the European level to stimulate the economy, make debt permanently sustainable, etc., even within the current treaties, as countless proposals put forward over the years have shown. But such proposals – let alone a more radical reform of the treaties in a more solidaristic and Keynesian direction, which would require a “Eurozone government” to run budget deficits with the support of a reformed ECB, full debt mutualisation, permanent fiscal transfers between countries, etc. – are simply not politically viable given the current balance of power among countries and the neoliberal path dependency of the EU and Eurozone.

What Greece really needs, meanwhile, like other periphery countries, is a massive public spending and investment boost – i.e., relatively high deficits for a prolonged period – and a lower and more flexible exchange rate. Neither of these two conditions, of course, can be met within the framework of the single currency. Ultimately, the experience of the SYRIZA government shows that implementing truly progressive, redistributive policies within the Eurozone framework is impossible.

This text is an edited version of a speech given at the conference “How to deal with Public Debt? – Lessons Learned & Policies Ahead” organised on 7 March 2017 by the GUE/NGL at the European Parliament.