The eurozone has never been so deeply in debt. The average government debt in the countries that use the euro as a means of payment was 100.5 percent at the beginning of this year. reported Eurostat statistics last week. This means that the national debt has exceeded the size of the economy for the first time since the introduction of the euro in 2002.
But there is no reason to get nervous about this, write three economists from ABN Amro this Thursday. In the coming years, too, it would be wise if governments were not frugal, but invested heavily in the future growth of their economy.
The ABN economists examined the six largest economies of the eurozone (Germany, France, Italy, Spain, the Netherlands and Belgium), the United States and the United Kingdom. Of these countries, the Netherlands has by far the lowest government debt (about 55 percent of gross domestic product), followed by Germany (almost 70 percent). Italy tops the list with a debt of about 156 percent of the economy.
What’s special is that this large debt burden is virtually painless for these eight countries. The amount they have to pay in interest payments on their government debt has never been so low for them – except for Spain. Thanks to the central banks, who still keep interest rates at exceptionally low levels.
The chance that interest rates will rise is very small, according to the ABN economists
But what if interest rates go up again? Can governments pay back their huge debt burden? That chance is very small, according to the economists. They anticipate that interest rates will remain low for a long time to come. They do mention one risk of interest rate hikes: high inflation. For example, if consumer spending increases so much that prices are pushed up rapidly, central banks may want to take action. By raising interest rates, they can encourage saving and discourage borrowing.
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But if that happens, the high inflation will not last long, the ABN economists expect. And for a government, high interest rates only become a problem if they remain high for a long time, says Aline Schuiling, one of the authors. “Debts have a long maturity. And that’s good too: if interest rates are low, it’s wise to fix them for a long time.”
In most of the countries surveyed, government debt will peak this year, after which it will slowly decline, economists expect.
They think it is sensible that many plans are already in place for large-scale investments. Such as the Growth Fund in the Netherlands, worth 20 billion euros. And the European Recovery Fund (750 billion euros), which was created despite the initial resistance from the Netherlands. Schuiling: “In the longer term, this will allow you to get on a higher growth path.” And as the economy grows, the relative public debt will fall by itself. After all, it is measured as a percentage of gross domestic product.
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But that only works if this money is used to make smart investments, says Schuiling, which promote future growth. “For example in infrastructure, ICT, green energy facilities. Then you can achieve higher growth in the long run.”
A version of this article also appeared in NRC in the morning of July 29, 2021