15 June 2022

Project Syndicate's Fuest: Don’t Raise the Eurozone’s Public-Debt Limit

In view of already-high levels of national debt and rising inflation in the eurozone, giving governments more debt leeway is the wrong way to go. Fiscal policy coordination should instead focus more on reallocating public expenditure and thus on increasing its quality rather than its quantity.

In February 2020, the European Commission announced that it would present a plan for reforming the eurozone’s economic governance, including the rules for public debt. After a lengthy postponement due to the COVID-19 pandemic, the project is now back on the table, amid widespread calls to give governments more leeway, for example to finance climate-protection spending. But, in view of the already high levels of national debt and rising inflation, this is the wrong way to go. Fiscal policy coordination should instead focus on reallocating public expenditure and thus on increasing its quality rather than its quantity. Any reform of the eurozone’s fiscal rules must start by considering the worsening economic conditions in Europe in recent years. The pandemic caused public debt to rise to more than 150% of GDP in Italy and 185% of GDP in Greece. When the debt of the Next Generation EU pandemic bailout fund is included, the ratio rises to 155% for Italy and 190% for Greece. Moreover, rising energy prices and the Ukraine war are delaying the recovery and further straining Europe’s public finances. Many countries are taking measures to help vulnerable citizens cope with rising energy costs and are increasing defense expenditure. Germany, for example, recently decided to spend an additional €100 billion ($105 billion) on armaments, financed entirely by new public debt...

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