"Europe caught between austerity and
growth : Which way out of
the crisis?"
Dr. Kurt Huebner
Jean Monnet Chair for European Integration and
Global Political Economy, University of British
Columbia
www.ies.ubc.ca
Debt, Debt, Debt
• ..is there an end?
…and more to come
• …Private debts
‘Swabian Housewife ‘ Approach
Expansionary Fiscal Consolidation
Hypothesis
• Reducing public debt by either expenditure
cuts or increases in tax receipts, or a
combination of both, is key for economic
recovery
• Lowering public debt softens any ‘crowding
out effect’ and returns ‘trust’ into financial
markets
• Reducing public sector employment and
public sector wages/entitlements
Does it Work?
• Short-term high social and economic costs
• Austerity and financial instability lead to
recessions
• …not only in the Eurozone
Lessons from the Past
• Empirical case studies of previous exercises in
internal devaluation show that austerity only
‘worked’ in combination with strong exports
• Not all can follow a ‘beggar-thy-neighbor’policy
• Paradox of thrift dominates
• Keeping troubled economies in ‘bad equilibria’
Banking crises and not so much public
debt crises
Private debt overhang crucial
De-leveraging of private sectors (households;
non-financial corporations, and financial
corporations)
Cleaning-up of balance sheets a difficult and
cumbersome process that tempers economic
growth
Shrinking growth or even GDP then leads to a
debt trap
Interplay risk and growth
• dt = pbt + (it-gt)/(1+gt)dt-1,
• with Δd change in general public debt, pb
denominating primary budget, i the effective
interest rate (including risk premium) on
public debt and g the rate of nominal GDP (t is
the time factor)
• the higher the yield above the growth of GDP,
the higher must be a primary budget surplus
in order to keep the debt constant
Interplay risk and growth
• dt = pbt + (it-gt)/(1+gt)dt-1,
• with Δd change in general public debt, pb
denominating primary budget, i the effective
interest rate (including risk premium) on
public debt and g the rate of nominal GDP (t is
the time factor)
• the higher the yield above the growth of GDP,
the higher must be a primary budget surplus
in order to keep the debt constant
Implications
• Bringing down yield via orderly defaults,
haircuts, bond-buy back actions…
• Using fiscal space by some economies
• Stretching adjustment without risking moral
hazard
• Redemption fund or other forms of
‘eurobonds’