The war in Ukraine poses further financial challenges for European countries.
(Photo: dpa)
In order to support households and companies, governments in Europe launched enormous spending programs. The national debt level rose sharply, also in Germany. The next shock follows with the Ukraine war, which leads to large expenditure plans; this time in particular for armaments and the conversion of the energy supply. Will the increase in government debt be a future brake on growth?
The economists Carmen Reinhart and Ken Rogoff published a paper in 2010 with the result that a government debt ratio of more than 90 percent of economic output goes hand in hand with significantly lower growth rates.
In Europe, policy makers have repeatedly invoked Reinhart and Rogoff to justify austerity: Higher government debt is bad for growth! The only unfavorable thing is that doctoral student Thomas Herndon found out in 2013: The result of a “magic” debt limit of 90 percent is not tenable at all if the data and analysis errors made by Reinhart and Rogoff are corrected.
But by then the spirit of austerity had long since been out of the bottle – with devastating effects: Because the austerity policy caused the economy to collapse so severely in several euro countries that debt sustainability actually deteriorated.
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But even after Reinhart and Rogoff, numerous researchers continued to study the question of whether higher government debt ratios are actually slowing down growth. Papers released by the International Monetary Fund and the World Bank support the thesis of a negative effect of higher government debt ratios on growth. This applies in particular above the previously discredited threshold of around 90 percent.
Fixing on the negative growth effects of increased government debt would be wrong
I have therefore systematically re-evaluated the existing specialist literature. It turns out that the impression that higher national debt ratios are a brake on growth is mainly due to the fact that publishers of economic journals are more inclined to publish articles with statistically proven effects than those that do not show such effects.
Philipp Heimberger is an economist at the Vienna Institute for International Economic Studies (wiiw).
Papers that show that there are negative growth results are therefore published more easily than those that show that such effects are not detectable. In addition, my results clearly contradict a threshold in the public debt ratio, beyond which growth is bound to slow.
A fixation on the negative growth effects of increased government debt would be wrong. Additional spending, which the German government is now preparing to reduce dependence on Russian energy supplies and cushion the macroeconomic shock, may increase the budget deficit and the level of national debt in the short term. However, they are not a long-term brake on growth.
More: How some southern EU states are slipping deeper and deeper into debt – and how others can free themselves.