# Strategic Public Debt Management and Fiscal Resilience

**Podcast:** bto – der Ökonomie-Podcast von Dr. Daniel Stelter
**Published:** 2026-02-11

## Transcript

BTO Beyond The Obvious, the Ökonomie Podcast with Dr.
Daniel Stelter.
Featured by Handelsblatt.
Hello and herzlich willkommen to a new ausgabe from BTO Refresh.
Staatsschulden müssen nicht nur schlecht sein.
Staatsschulden können auch gut sein.
That is zumindest die These von Barry Eichengreen, mit dem ich for einige Zeit über sein Buch gesprochen have in defense of public debt.
Zu Deutsch, zur Verteidigung von Staatsschulden.
Ich denke, diese Verteidigung lohnt gerade in der actuellen Diskussion einer Aufrischung.
And genau das machen wir jetzt in der heutigen Ausgabe von BTO Refresh.
Schulden sind generell nicht schlecht, wenn man sie produktiv nutzt.
Das gilt übrigens auch für Staatsschulden.
Je höher die Zukunftsquote, desto höher darf auch die jährliche Verschuldung sein, würde ich sagen.
We have allerdings am letzten Sonntag gesehen, dass das nicht so richtig funktioniert.
Denn je mehr Schulden die Staaten machen, desto geringer sind die Zukunftsinvestitionen.
And genau darin liegt die Gefahr der aktuellen deutschen Politik.
We have viel zu lange to wenig ausgegeben for the Zukunft.
And jetzt stopfen wir Löcher auf Kredit, vorgeblich, um in die Zukunft zu investieren.
And in Wahrheit stecken wir es in Konsum.
Aber generell sollte man nicht sagen, Staatsschulden sind prinzipiell schlecht.
Staatsschulden können durchaus eine wichtige Rolle spielen.
Vor allem, weil Staaten als andere Schuldner auch nicht unbedingt ihre Schulden tilgen müssen, sollen diese einfach weiter fortschreiben und umschulden.
Der entscheidende Indikator ist weniger die absolute Höhe der Staatsverschuldung als die Entwicklung der Staatsverschuldung relativ zum Bruttoinlandsprodukt.
Das Thema der Staatsschulden ist hochinteressant.
Und deshalb wundert es auch nicht, dass immer wieder Ökonomen sich zu dem Thema äußern.
So erschien vor einigen Jahren ein Buch in den USA.
Titel des Buches In Defense of Public Debt.
Die Autoren sind führende US-Ökonomen.
In dem Buch blickten die Autoren zum einen auf die Geschichte von Staatsschulden, beginnend bei den italienischen Stadtstaaten.
Und sie kommen natürlich auch zur heutigen Zeit, wo wir hohe Staatsschulden haben.
Und die Autoren zeigen auch in ihrem Buch, wie sich die Staatsschulden verändert haben.
Früher ging es um Landesverteidigung und heute geht es zunehmend auch um Kredite zur Bereitstellung des öffentlichen Gutes der finanziellen Stabilität.
Übersetzt zur Bekämpfung von Wirtschafts- und Finanzkrisen.
Staatsschulden, so führen die Autoren aus, führen zu Eisenbahn, städtischer Infrastruktur, aber auch zu sozialem Kapital and können so das Wirtschaftswachstum untermauern.
Nach dem Motto, Staatsschulden können durchaus gut wirken.
Weil ich das Thema so interessant finde, habe ich mich mit einem der Autoren, mit Professor Barry Eichengreen, im April 2022 zum Gespräch verabredet.
Ein Gespräch, welches sich lohnt, heute in Erinnerung zu rufen.
Before we zu meinem Gespräch mit Barry Eichengreen kommen, noch dieser Hinweis.
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Doch nun zu meinem Gespräch mit Barry Eichengreen aus dem April 2022.
Barry Eichengreen ist ein Westamerikanischer Wirtschaftswissenschaftler und Professor für Ökonomie und Politische Wissenschaften an der University of California Berkeley.
Sein Hauptforschungsfeld sind die internationale Makroökonomie und die Geschichte des Finanzsystems.
Während der Asienkrise war er für den Internationalen Währungsfonds tätig.
Dort arbeitete er an der Analyse praktischer und theoretischer Probleme der Liberalisierung der internationalen Kapitalmärkte.
In einem Interview aus dem Jahr 2015 sagte er, ich bleibe dabei.
Die Einführung des Euro war eine der größten ökonomischen Fehlentscheidungen des 20.
Jahrhunderts.
Sie lässt sich jedoch nicht mehr zurückdrehen, weil die Kosten für die Auflösung des Euroraumes einfach zu hoch sind, selbst für Deutschland.
Wie immer bei Englischsprachen Interviews folgt nun eine Zusammenfassung der wichtigsten Highlights und im Anschluss das gesamte Gespräch im Original.
Zunächst habe ich Professor Eichengrin gefragt, warum die ganze Welt Staatsschulden nicht so kritisch sieht, wie aber in Deutschland so skeptisch sind.
Ob wir hier ein Fehler machen.
So, what's wrong about the Germans?
Well, Germany has a history.
Germans look back not not unreen auf die deutsche Geschichte.
We wouldn't immer wieder an die 1920er Jahre denken, wo die hohen Staatsschulden eben zu inflation geführt haben.
And this führt aus seiner Sicht zu einer Verengung der Perspektive.
Sicherlich sind Schulden nicht ohne Gefahren, aber es gilt auch für andere öffentliche Einrichtungen, wie beispielsweise Armeen.
So that there are many worthwhile public institutions that also have dangers.
Countries have armies, they have weapons.
Absolutely.
So Germans who say that are correct.
That having fiscal space is valuable.
But the reason that we have to use the other thing that we have to do is that the other thing is that the other thing is that the other thing.
My frage was then.
Gibt es nicht eine Grenze für die Staatsverschuldung?
Is that a problem?
Wo is the rich wert?
We've learned from history and from economic analysis.
The IMF in its debt sustainability exercises provides a upside scenario, a downside scenario, most likely scenario, and depending on how risk averse you are you may want to attach more weight to the slow growth, high interest rate.
And the Central Banken for the Künftiger Inflation, Inflation between the two erstellen.
A good scenario, a schlecht scenario, a wahrscheinish scenario.
And Risiko Freudigman is a alternative by the finanzplan.
So the case you cite Italy.
Eichenkrin betont that Italien in the Tat laufend Haushaltsüberschüsse erzielt hat.
Italy has done an admirable job while at the same time, würde ich auch selber ergänzen, das is es aber.
And I think now going forward, simply running primary surpluses will not be enough to put Italy's.
Even if they grow per capita GDP over time, it's going to be hard for them to grow the number of capitalists.
Doch widerlegt die Modern Monetary Theory nicht seine Aussagen, fragte ich dann.
Ist Japan nicht das beste Beispiel dafür?
Modern Monetary Theory is a little bit like an economist's Rorschach Test.
Aber das ist eben eine ungewöhnliche Situation.
Ökonomen sprechen von einer Liquiditätsfalle.
And er, Eichengreen denkt, dass der Fehler der Modern Monetary Theory ist, dass sie diese Liquiditätsfalle für einen Zustand hält, der immer da ist.
Wir wissen aber, mein Eichengrin, dass es andere Umstände gibt, unter denen sich die Zinssätze nicht um null herum beruhigen, vor allem dann, wenn der Inflationsdruck zunimmt.
And sofort befinden wir uns, wie jetzt gerade, in einer ganz anderen Situation.
Und was sagt er mit Blick auf die Inflation?
In den Vereinigten Staaten warnen die Menschen davor, dass die Arbeitslosigkeit so niedrig ist, wie es überhaupt möglich wäre und deshalb natürlich der Lohndruck zunimmt.
Die Produktionskapazität ist aufgrund von Lieferkettenunterbrechungen und dergleichen angespannt.
Und die Ausgabenprogramme von März 2021, der Biden Stimulus, das war zu viel.
Das alles wirkt inflationär.
And er denkt, dass es ein Beweis dafür, dass es wahr ist, dass eben die Modern Monetary Theory nicht immer stimmt.
So to remind your listeners, the book is entitled In Defense of Public Debt, but that's not a license to issue additional public debt under all circumstances.
Das Buch zwar den Titel trägt In Defence of Public Debt, but that is keine Lizenz, um unter allen Umständen zu Staatsschulden zu machen.
Ich frage da eigentlich dann, ob das unterschiedlich hohe Niveau der Staatsschulden in den Einzelnen Euroländern nicht ein Problem ist, and ob die EZB da überhaupt noch unabhängig handeln kann.
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Eichenkrieg erklärt, dass die Sorge der Euroarchitecten ursprünglich gesehen is, dass sie angst davor hatten, dass die EZB unter Druck common would the online markers to stutzen and the Zinsen niedrig zu halten, when it hochverschuldete Mitgliedstaaten im Euro Raum gab.
And deshalb gab es ihm diese Regeln besuchlich verschuldungsquote.
And sobald die EZB die Staaten finanzieren würde, wäre das inflationär.
Bis jetzt haben wir eine solche Inflation, my Eichencreen, in Europa allerdings noch nicht erlebt.
And obwohl Griechenland anderer hohe Schulden haben, hat er nicht den Eindruck, dass dies zu einem unwiderstehlichen Druck auf die EZB gefut hätte, entsprechend zu handeln.
The debt situation in Italy and Greece will complicate the ECB's efforts now to begin raising interest rates, which uh it's gonna have to do.
What is it, 25% of the Eurozone that Germany accounts for in mind?
I think Italy's failure to grow is part of the problem in terms of achieving debt reduction, fiscal consolidation.
But I would not blame that, attribute that inability to grow to austerity.
And I glaubt, that in der Lage sein werden the Verschuldung durch Wachstum relativ zum Bruttoinlandsprodukt zu reduzieren.
Eichen Green bringt es so auf den Punkt.
Right now it's good for bringing down the debt ratio because inflation has gone up, but interest rates have not yet.
In the United States, on the other hand, the average maturity of the debt is only five years.
So we are refinancing, rolling over a considerable fraction of our debt every year.
The idea that we're simply we can simply inflate away the debt is premised on the notion that investors are stupid.
Emerging economies are gonna feel the pain inevitably, unavoidably, as rates go up in response to inflation.
So if you look at emerging markets today, governments mainly borrow in their own currencies, but corporations when they borrow externally in dollars.
And that has Eichen Green, the investor doppel, so to say the Siegness Schiff to verless and of these arts and ways the problem for the staten to eran.
And that the Zinserhungen der US Fed, egal ob not in the US dollar or not in US dollar, see they eat the risiken, that Zinssteigerungen in Schwellenländern zu problemen führen.
The Schlussfolgerung für ihn is when they are a growth of Schulden by Ausländern have a problem.
Egal if it's um Fremdwährungen handelt or um the eighteen Währung.
Argentinien is a Musterbeispiel for a staat that with Schulden offensichtlich nicht umgehen kann.
We show in the book more generally that countries with polarized politics, polarized political systems.
Government oscillates between the far left and the far right, if you will.
Find it hard to agree on the find it difficult to sustain sound policies over time.
Both sides prefer to spend on their preferred programs before they lose office to the other side.
And that's Argentina, in a nutshell.
And genau this would man in Argentinience beobachten.
The meisten of ihnen bewegen sich, so Eichengreen, in der Mitte des politischen Spektrums.
And that is it einfacher a vernünftige Politik durchzuführen, which am Ende eben auch in einer besseren Creditwürdigkeit niederschlägt.
Bedeutet das nicht, dass die USA auf dem Weg sind, kein so guter Schuldner zu sein.
That is my worry.
So it's indisputable that US politics have become more polarized over the last three or four decades.
But Deutschland perspektivisch the besser schulder is einfach deshalb, weil er nicht die Hoffnung hat, dass es bald zu einem Ende der Polarisierung in den USA kommen wird.
We show in the in the book that domestic debt restructurings are few and far between.
Because the analyse der Historia gezeigt hat, dass es solche Schuldenschnitte nur sehr selten gibt.
For that ground glaubt er that it for registering and gesellschaft immer besser is an anderen Weg to get.
And er denkt hier eben an die Umschuldung in form of a gross inflationsüberraschung.
And deshalb sagt er im Kern letztlich, that is weder the wake des Schuldschnittes nor the Inflationsüberraschung realistischerweise zu erwarten.
Unlikely, recall the case of Greece.
That was an extreme case of an unsustainable debt, and ultimately that debt was restructured.
But it took three years of chaos to get there, and produced a very deep recession in the interim.
Eichenkrin verweist auf die Geschichte.
Die damaligen 13 US-Bundesstaaten haben ihre Schulden damals gebündelt.
Eichen Green verweist darauf, dass die politischen Umstände damals in den USA natürlich ziemlich einmalig gewesen seien.
Aus Sicht von Eichenkrieen haben wir in Europa in Jahre 2020 dennoch etwas ähnliches erlebt.
Namlich die Schaffung des Wiederaufbaufonds, das sogenannten Wiederaufbaufonds, der immerhin 750 Milliarden Euro an gemeinschaftlichen Schulden bedeutet.
Er geht dann weiter anders, von denen er hoped darauf that it weitere shit with the Wiederaufbaufonds und auch in Zukunft quasi immer mehr Schulden auf Europäische Ebene gemacht werden.
But transferring Italian government debt to the European Union, clearly there's no appetite for that.
I don't know about today, but yes, your recollection of American history is basically correct that states began to borrow again.
Eichengreen stimmt mir zu anders, nach der großen Entschuldungsaktion, begonnen, wieder in erheblichen Umfang Kredite aufzunehmen, vor allem in 1820er und 1830er Jahren, um Eisenbahn zu bauen und die Wirtschaft zu fördern.
Als eine neue Schuldenkrise aufkam, hat aber der Bund keinen weiteren Belout gemacht.
And as Reaktion auf diese traurige Erfahrung, haben die Bundesstaaten der USA Haushaltsausgleichsgesetze verabschiedet, die entsprechen der schwarzen Nullregelung in Deutschland.
Das heißt, die einzelnen Bundesstaaten in den USA dürfen sich eigentlich nicht mehr verschulden.
Eichengreen erschildet seine persönliche Erfahrung aus California, weil damals in California aufgrund der Finanzkrise die Staatseinnahmen deutlich sunken.
Mussten der Staat California die Gehälter für die Mitarbeiter des öffentlichen Dienstes, einschließlich der University of California, senken.
And what I had with Illinois, wo eben die zukünftige Pensionsverpflichtungen so hoch sind, hat er gesagt, yeah, this is an künfticous problem, but this problem must imstaat gel.
But when underneath investigators, these investments erzielen.
And deshalb sagt er, wenn qualifizierte Experten from the political unabhängigwide, müssen wir uns auf deren Urteile verlassen, anders idealerweise auf der Grundlage ihrer Urteile operation.
I think a book that was called In Defense of Prudent Public Debt Management, or a book that had been entitled A Balanced Analysis of Public Debt probably wouldn't have attracted the same same attention.
But then, dass wir die Militärausgaben schnell erhöhen müssen, um diesem geopolitischen Notfall zu begegnen, dann ist das richtig.
Diese Ausgaben müssen schnell hochgefahren werden und die müssen schneller hochgefahren werden, als die Einnahmen wachsen.
Aber er meint, dass sobald der unmittelbaren Notfall forbear is and the anpassing forgenommen wurde, that is then ganz wichtig and richtig ist, eine Diskussion darüber to fifth, ob the schulden zurückgezahlt werden sollen, und dass man diese dann durch Überschüsse tilken sollte.
Bezüglich des zweiten Punktes der Investitionen in die Bekämpfung des Klimawandels, dann sagt er ja, da ist die Frage natürlich, soll das bezahlt werden durch neue Kredite oder aus den laufenden Einnahmen.
Und dann hat er gesagt, wenn es eine einmalige Investition ist, also wenn man einmalig was tut für den Klimaschutz, und das war's, dann spricht einiges dafür zu sagen, das kann man erstmal finanzieren über Schulden.
Wenn man aber davon ausgeht, dass unsere Gesellschaft auf absehbare Zeit jedes Jahr in den Kampf gegen den Klimawandel investieren müssen, dann müssen wir dies aus den laufenden Einnahmen finanzieren, da es sich eben nicht um eine einmalige Investition handelt.
Ein weiterer Aspekt ist nicht nur diese Frage, sondern auch die Frage, wie es denn um die Rendite der Investitionen bestellt ist.
Wenn man also glaubt, dass sich auszahlt, also wirtschaftlich auszahlt, in die Bekämpfung des Klimawandels zu investieren, zum Beispiel, indem man neue Industrien aufbaut und auf diese Art und Weise künftig mehr Geld verdient, dann kann man das mit Krediten finanzieren.
Wenn man aber der Meinung ist, dass diese Investitionen gesellschaftlich zwar nützlich sind, aber letztlich nichts zu künftigen Wirtschaftswachstum beitragen, dann sollten die Steuern erhöht oder andere Ausgaben erkürzt werden, um die Maßnahmen gegen die Klimawandel zu finanzieren.
Then taxes are going to have to be raised or other forms of spending are going to have to be cut in order to pay for them.
Jeder Staat, jede Gesellschaft müsste selber entscheiden, wie groß der Staatssektor relativ zur Wirtschaft sein sollte.
Für ihn ist auch ganz wichtig, wie der Staat sich finanziert.
Generiert er seine Einnahmen auf eine effiziente, nicht verzerrende Art und Weise, oder greift Personen die Wirtschaft ein, dass seine Maßnahmen die Wachstumskräfte behindert.
Für ihn ist der Hauptkritikpunkt, dass Regierungen dazu neigen, zu wenig Geld für die Jugend, zu wenig für die Bildung auszugeben, und eher mehr für die Alten.
Damit sagt er, haben wir genau das Falsche.
Eigentlich müsste man mehr tun, um in die zukünftige Entwicklung des Landes zu investieren.
Our governments have a tendency to spend too little on the young, to invest.
So the highlights of my display with Barry Eichengreen.
In a many seconds, the original.
On this stuff, who the highlights by you for this time and common Sunday.
And that is the two of the communal finances in Deutschland.
And I have an Oberburgermeister candidate to Gast, who may a big start, when a once rich stuff in quite spannend, a very warm welcome to my podcast.
Good to be here.
Professor Eigengren, you just published a book with colleagues called In Defense of Public Debt.
And as you know, I'm calling you from Germany, and the Germans, we are not so really keen on public debts.
You know, we had the so-called Black Zero, and we were proud of having low debt levels, and we were committed after Corona to go back as quick as possible to balance budgets.
Now we've got a war, but I I think even now we are saying, well, at latest 2023, we have to have a balanced budget.
So what's wrong about the Germans?
Well, Germany has a history.
And um Germans look back uh not unreasonably to the 1920s, when uh indebtedness, uh uh foreign indebtedness in particular was a factor in the high inflation in 1922-23.
Um that had a searing effect on attitudes and outlooks.
That experience is taught in German schools, all of which is appropriate, but it leads to uh fixation on uh the dangers of debt.
So uh that there are many worthwhile public institutions that also have dangers.
Uh countries have armies, uh they have weapons.
Uh recent experience reminds us why.
But there are dangers associated with mobilizing them and deploying them, and the same is true of public debt.
We wrote the book because we thought that dialogue in a variety of countries, not only Germany, but in the United States as well, was dominated by people who were aware, conscious of those dangers.
But perhaps they downplayed or sometimes were oblivious to the utility of public debt, especially in emergencies.
So we wrote the book before COVID.
We started the book before COVID.
We certainly completed and published the book before the war on Ukraine.
But both COVID and the war are reminders that public debt is a valuable instrument of national defense, if you will, in emergencies.
Well, now the Germans would say, hmm, we are in a much better position to spend now more money and to take on no credit because we're so thrifty were so thrifty in the good times.
Um and other countries, they have already much higher debt levels.
If you look at France or Italy, so for them it comes on top on a very high level.
And for us comes on a lower debt level.
Aren't we not in a better position because we have lower debt levels?
Absolutely.
So Germans who say that are correct.
That having fiscal space is valuable.
But the reason having fiscal space is valuable is in order to use it when appropriate, when the need arises.
The conclusion of our book in defense of public debt is that prudent governments, when the time is right, will restore and enhance that fiscal space.
I think that is true of my country, for example, the United States, where debt in the hands of the public is about a hundred percent of GDP as we speak.
Uh going forward, if there is another uh geopolitical emergency, climate-related disaster, something that requires government to issue debt and borrow, Germany will be in a more comfortable position than the US.
And again, when the time is right, when economics and uh geopolitics settle down, I think some fiscal consolidation reducing the debt ratio would be appropriate for the for the U.S.
But you mentioned fiscal space.
Could you probably define it?
Because you know, we have discussions in Europe.
Let's take Italy.
Italy has a debt level in the range of 160% of GDP.
So where's the limit?
We've learned from history and from economic analyses that there's no magic number, that the limit depends on uh circumstances and economic conditions.
Specifically, it depends on the evolution of two variables, the growth rate of the economy and the interest rate that has to be paid on the debt.
The faster the economy grows, the faster you're increasing the country's capacity to service debt.
You're raising the denominator of the debt to GDP ratio and making any nominal amount of public debt more comfortable because it's easier to service and repay out of growing government revenues.
On the other hand, as the interest rate goes up, it becomes more expensive to uh roll over maturing debt and service outstanding obligations, especially if they are relatively short in terms, short maturity debt, in other words.
So in thinking about the limit, you have to have confidence in the clarity of your crystal ball.
Do we know how fast our economies are going to grow going forward?
Do we know how interest rates are going to evolve?
So when the International Monetary Fund, for example, tries to answer that question, it provides a range of scenarios.
And in the same way that central banks now produce fan charts for future inflation, uh kind of a range uh of possible outcomes.
The IMF in its debt sustainability exercises provides uh upside scenario, a downside scenario, uh, most likely scenario, and depending on how risk-averse you are, uh, you may want to attach more weight to the slow growth, high interest rate downside scenario.
My understanding is actually that normally governments don't pay back debts, but they are always refinancing it, and then if the economy grows, your debt-to-GDP ratio goes down.
In your book, you mentioned the example of the United Kingdom after the Napoleonic Wars, where the growth rate was not high enough, and therefore the government had to run a primary surplus.
And it worked.
If you now look into Europe, um many critics of the salary policy point to Italy and say, well, Italy had a primary surplus for many years as well, but in the end had higher debt than before because the growth rate didn't pick up.
So on austerity, is the gross effect of austerity in today's world too big that you cannot save yourself out of trouble?
No, I think saving oneself out of trouble and paying down the debt can be part of the solution.
But I think only part.
So the case you cite Italy really epitomizes the point that in in terms of running budget surpluses, primary budget surpluses, Italy has done an admirable job while at the same time failing to reduce its debt to GDP ratio significantly because it has hadn't solved the growth problem.
And I think now going forward, simply running primary surpluses will not be enough to put Italy's public debt, which is on the order of a hundred and sixty percent of GDP on a sustainable footing.
They need to grow the economy as well.
And here people are hopeful that Mr.
Draghi's reforms and more uh incentive to um reform the Italian economy, make it more dynamic, make it more flexible in order to continue to obtain uh economic recovery program funds from the EU will begin to solve that problem.
Uh unfortunately, Italy is also very challenged demographically.
So even if they grow per capita GDP over time, it's gonna be hard for them to grow the number of capitalists.
Actually, it's the same in Germany, and that's why I was a bit surprised that you said Germany is in a better position than the US because the US still has a better demographics.
Um but before we dive into more um the aspects of how to deal with debt, I have to bring up um what people call the modern, I'm sure you will disagree, but it's a modern mortal theory.
And they would basically claim government debt doesn't matter because the government is basically creating the money by taking out the credit, which I think is technically correct.
And therefore they would say there's no need at all to pay back debt.
Just look at Japan, you can have as much debt as you want.
Modern monetary theory is a little bit like an economist's Rorschach test.
Different people look at it and they see different things.
I read modern monetary theory as the assertion that central banks can buy as much public debt as they see fit and increase the money supply insofar as necessary in order to do so, without inflationary consequences.
And we've seen in the last 10 or so years that there are special circumstances where that's true.
There was a lot of central bank purchasing uh uh of government bonds and money creation for the since the global financial crisis, with minimal inflationary consequences in the advanced countries in particular.
Uh economists refer to that as a liquidity trap situation.
I think the flaw in modern monetary theory is they generalize that circumstance, that outcome to all times and places.
And we know there are other circumstances where interest rates are not becalmed around zero, where inflationary pressures intensify, and lo and behold, we're in one of those very different situations now as we speak, where as soon as modern monetary theory becomes fashionable, gains attention, if you will, the circumstance under which it's valid no longer applies.
Yes, as we speak about the current situation, we had already inflation peak up before the war, but now uh given the war and give the sanctions, even if the war hopefully might be ended in a few weeks' time when we when we air the show, um, we still might have you still have an impact on raw material prices and oil prices and therefore on inflation.
So I I would interpret your words in the way of saying, well, um, governments have to be careful now with spending and with credits in such a circumstance if they don't want to have more inflation.
Governments have to be careful with spending, central banks have to be careful with not falling further behind the curve.
Okay, basically, what you say is if central banks are more restrictive, then what we have is the government spends, and then other people don't spend as much, and so you have less combined demand as the economy.
In the United States, uh, people have been warning that unemployment has fallen as low as it can fall, that capacity to produce is strained because of supply chain disruptions and the like, and that uh the additional deficit spending in uh March of 2021, the last Biden stimulus was too much.
It was inflationary, and I think we are seeing an accumulation of evidence that that's true.
So uh to remind your listeners, um the book is entitled In Defense of Public Debt, but that's not a license to issue additional public debt under all circumstances.
Um as you speak about the outlook now, if you speak about um I think we are we will we will face a more deflationary scenario most probably in the coming coming years.
If you now think about Europe, and I know you've been or no, I know I read and I hope it was correct that you have been a bit skeptical around the euro.
In in fact, the opposite.
So I've been thinking and and and writing about what became the Euro since 1990, and for a long time I was kind of uh the American who was convinced it would happen, as it did in 1999.
Then in 2008, I uh right before the Euro crisis, I was commissioned to write a piece for uh uh a conference volume on the Euro, where my commission was to write about how the Eurozone might break up.
And my conclusion that was that it couldn't and wouldn't happen because the costs of getting out would be so great.
It would be hard to get out of the Euro and stay in the European Union.
Uh talking about getting out could provoke capital flight and the mother of all financial crises.
And I think we've seen that view validated by what's happened in Greece, where if Greece didn't leave under the circumstances, the dire circumstances it faced, then no one's gonna leave.
Uh here in California, we like to say um the Euro is like Hotel California.
You can check in, but you can't check out.
Um I think there are structural problems with the Euro.
Some of them are are on the way to solution.
So uh nobody realized in 1999 that a monetary union without a banking union was problematic, but now considerable powers of bank regulation have been transferred to the European Central Bank.
Uh Capital Markets Union is still a work in progress, and there is a little bit of transfer of fiscal powers as a result of the pandemic to the European Commission, to the EU level.
But you know, the Euro area is still a monetary union without a fiscal union.
Labor mobility is still lower in Europe than it is in the United States.
So the Euro doesn't work as Euro area doesn't work as smoothly as the dollar area.
I'm a skeptic in that respect, but I'm convinced that the Euro is here to stay.
And in order to stay, and coming back to the public debt issue, in your view, does it play a role that the public debt levels are so different given the members of the Eurozone of the Eurozone?
So Germany being around 80, France 140, Italy 180, probably soon.
So Greece very high.
Does it matter, or do you say in the end it doesn't matter?
The um concern of the architects of the Euro when they put these um reference values into the Maastricht Treaty in 1992 that debts should not exceed 60% of GDP or should converge toward 60% of GDP.
The concern then was that if there were some heavily indebted member states in the Euro area, the ECB would feel pressure to support their bond markets and keep interest rates low, and that would be inflationary.
Up until now.
So even though Greece and Italy and some others have not heavy debts that far exceed as a share of GDP what you see in Northern Europe, that hasn't translated into irresistible pressure on the ECB to inflate.
That could, you know, it's it clearly the debt situation in Italy and Greece will complicate the ECB's efforts now to begin raising interest rates, which uh it's gonna have to do.
But will it hesitate for so long that inflationary pressure in Europe becomes persistent and irresistible?
The history of the ECB suggests not, that they will make monetary policy with the Eurozone as a whole and the 2020, what is it, 25% of the Eurozone that Germany accounts for in mind?
Well, it's you know, you could also say, well, like MMT is in fashion after an exceptional period, you could say the ECB had not been under pressure, it might also be just an exceptional period.
We will see now going down the road when the inflation peaks up, what's what CPC is doing.
But if we are if we are now um thinking about how to deal with debt levels, because we spoke about but first of all, you you said basically government debt is good in circumstances, special circumstances, pandemic, war, whatever.
You also said that it's good to it's it would be wise to reduce government debt once these exceptional times are over.
I think that's would be the German approach.
And we spoke about austerity, and austerity didn't really work in Italy because lack of growth.
So, what other options would the Europeans or would ever countries have to deal with with government debt levels which are perceived to be too high?
Just to clarify a point, I think Italy's failure to grow is part of the problem in in terms of achieving debt reduction, fiscal consolidation.
But I would not blame that uh attribute that inability to grow to austerity.
I would attribute it to weak investment and structural rigidities and inefficient public administration, all those other familiar Italian problems.
So I think that going forward, governments are are are going to be able to reduce their debt-to-GDP ratios, and again, it's relative to GDP that we should be measuring and thinking about how burdensome the public debt is by reducing the denominator of that ratio, the the numerator of that ratio, the debt through budget surpluses, and growing the denominator of that ratio through pro-growth policies.
High energy prices obviously are going to be headwind a challenge in the immediate future.
But Europe is more serious than the United States about transitioning away from fossil fuels, about harnessing wind power and so forth.
So I think there are high return investments to be made there.
And skeptics in Germany would say, well, the truth is that the ECB is going to support inflation because it's um true lever to grow the denominator because NGDP goes also up, not because of real growth, but because of devaluation of money.
Yeah.
So the the question is whether the debt can be inflated away, and whether inflation is going to be good or bad for debt consolidation.
Right now, it's good for bringing down the debt ratio because inflation has gone up, but interest rates have not yet.
But uh investors and others are going to catch on.
And I think if inflation remains high, interest rates will catch up and rise potentially even more than inflation has risen, at which point inflation is counterproductive from the point of view of debt consolidation.
So this is more of a problem in some countries than others.
In the United Kingdom, the average maturity of the debt is 14 years.
So only a little bit of that debt has to be rolled over and refinanced at higher interest rates every year.
So we are refinancing, rolling over a considerable fraction of our debt every year, potentially, depending on what now happens, uh as a result of inflation at higher interest rates.
So the idea that we're simply we can simply inflate away the debt uh is premised on the notion that investors are are stupid.
And when it comes to inflation, I think they catch on.
So no, and again, you know, if you're now going too far away from from your book, please forgive you, but I have to ask this question because if you assume interest rates go up, this has an issue for some debtors.
You made a good point.
By the way, Italy also has very long found its uh bonds.
Um but it also has an implication on asset markets.
Because we would clearly say is it's a current valuation of stock markets or of real estate depends on low interest rates.
Yeah so I uh that's clearly right and one reason that central banks have been moving incrementally gradually in terms of what they call policy normalization.
And in other words winding down asset purchase programs and beginning to raise interest rates is they don't want to wrong foot or upset financial markets.
So I think they will continue to move I think central banks understand that a lot of what we've seen in financial markets is uh consequence of having had low interest rates for a very long time.
What's going to happen to Bitcoin prices when interest rates go up?
They're almost certainly going to come down because with uh zero returns on a variety of other things, people have been, speculators have been looking around for something else to buy.
When keeping your money in the bank again begins to yield positive interest, I think those speculative investments will be less attractive.
So that means that these high-risk markets, cryptocurrency is one example.
Emergies is another, are gonna feel the pain inevitably, unavoidably, as uh rates go up in response to inflation.
And they're also going to feel the pain because the debt levels are high, also especially in US dollars.
So as you speak about um public debt, I would assume you are always proposing public debt in your own currency.
Well, in the book, we talk about public debt both in foreign currency, typically in dollars, and in the domestic currency.
So if you look at emerging markets today, governments mainly borrow in their own currencies, but corporations, when they borrow, borrow externally in dollars.
I had an incarnation in the 1990s where I worked on that subject in particular, and suggested that foreign currency denominated debt was especially risky because uh the cost of servicing it depended on what the Fed did, what the dollar did, which was out of the control of local authorities in other countries, and they would be advised to try to develop financial markets at home where debt was denominated in their own currencies.
And a number of countries have moved in that direction.
As I said before, quite a few emerging markets are now able to issue debt denominated in their own currency.
But what we've discovered is that when the Fed begins to raise interest rates, even that debt can become risky and uh its prices can become volatile, because uh foreign investors experience our two shocks at the same time.
Uh double whammy is the way we put it uh here, that uh when interest rates go up, the value of those debt securities, those bonds goes down.
But also if the local currency depreciates against the dollar because the Fed is tightening, the value of the bonds uh declines in the eyes of foreign investors for a second reason, and those foreign investors are apt to run for the exits.
So the conclusion then is if you have a lot of a lot of your debt is held by foreigners, um you're in in trouble if it's foreign currency denominated, and you can be in trouble if it's domestic currency denominated.
Yeah, actually, I read a study showing that even the ESAB influences global interest rates because these big social banks have implications globally.
But as you talk about uh poster chart for regular problems, Argentina, I'm sure Argentina shows up in your book as well.
Uh why is Argentina not making the best out of public debt but as always running into regular crisis.
Well um we show in the book more generally that countries with polarized politics, polarized political systems.
The government oscillates between the far left and the far right, if you will find it hard to agree on f find it difficult to sustain sound policies over time.
Both sides prefer to spend on their preferred programs before they lose office to the other side.
And that's Argentina in a nutshell stretching back for more than a century now.
Germany and and and that and that outcome depends partly on history and it depends partly on on the structure of the electoral system.
So Germany's electoral system creates incentives to form coalition governments where parties move, most of them move toward the center of the political spectrum, and it's easier to agree on the maintenance of reasonable policies, it seems to me.
So we link uh that history to the current electoral system and in turn link that to whether you end up with good or bad fiscal policies.
Well now, um I have to ask the question, um, and you can of course say cut it out.
I don't want the question, because of course the US is not as polarized at the hard left and the hard right.
But when I uh follow US discussions, I have the impression that US politics is also getting more and more polarized.
So Woods basically means that the US is down the road not such a good capture anymore.
That is that is my worry.
So it's indisputable that US politics have become more polarized over the last three or four decades.
That reflects the role of media in the United States.
It reflects the way congressional district lines are drawn.
So political candidates stake out more extreme positions in order to defeat their primary election opponent, and then they don't have to worry about the general election because their party dominates uh the local district.
I think polarization here reflects the role of money in American politics.
But the resulting polarization does make me more worried and skeptical about governance going forward and therefore about the country's uh fiscal prospects.
So, yes, I would be more sanguine about uh the future evolution of the debt in Germany than in the United States.
Maybe that's been true for a while.
But I think the contrast between the two countries is even more pronounced now than it has been in the past.
But coming coming back to Europe, then we spoke about Italy, and you basically said they have to do reforms and should grow faster.
I'm I have to admit I'm a bit skeptical, but I think we agree on the goal.
And others say, well, you know, it's simply we should just um do a debt restructuring.
Come to the second option as well.
The first option would be we should do a debt restructure in Italy, and if you look into the private private wealth of the private Italians, you could say, well, they're rich enough, you know, or to talk with Thomas Piquetti, it's just a problem of the wrong distribution of wealth between the public and the private sector.
Well, we show in the in in the book that domestic debt restructurings are are few and far between because the bondholders, if you will, are a political constituency.
They're often a powerful political constituency.
So one does see debt restructurings, domestic debt restructurings, occasionally in history.
But when government and society is unable to agree on a way to another way to bring the debt under control, more typically what you get is hidden, invisible debt restructuring in the form of uh a big inflationary surprise that reduces the real value of the debt.
So for a member of the Eurozone, that big inflationary surprise is not value uh viable.
For a country like Italy, where a lot of the debt is held not only by the wealthy, but by insurance companies and pension funds and the like, I think domestic debt restructuring is unlikely.
Recall the case of Greece.
Uh that was an extreme case of an unsustainable debt, and ultimately that debt was restructured, but it took three years of chaos to get there, and uh produced uh uh a very deep recession in the interim.
Yeah.
So no one wants a deep recession at a c uh so basically no debt restructuring accorded.
The other point is the idea of pooling the debts.
People say, you know, we have a transfer union, and so German taxpayers help Italian taxpayers to pay for the government debt is not really popular.
Um have there been any examples in this regard, and what's your view of such a strategy?
Well, probably the best example of this would be the thirteen US states after our war of independence with the British.
So Alexander Hamilton famously in seventeen ninety uh got the Congress to agree to pool the debts of the uh thirteen states which had all uh issued their own obligations in the course of fighting the English uh twenty years earlier.
So it can be done, but those clearly those political uh circumstances were distinctive, unusual.
So we saw something similar in Europe in twenty twenty, right?
An exceptional circumstance called COVID nineteen led European countries to agree to uh permit the European Union to issue seven hundred and fifty billion euros worth of bonds that were pooled.
They were obligations of the Member States collectively.
Uh so I think this um it it's pretty clear the Member States will will agree to this.
Germany will agree to it only on a uh limited basis in response to truly exceptional circumstances.
So I have lots of academic colleagues, lots of academic friends who imagine a world in which the debts of uh Euro area countries are pooled.
I think I know enough about European politics to understand that in reality uh that's not going to happen.
And what we may the best we can hope for along those lines, the most we can hope for along those lines is that the decision in in 2020 to issue 750 billion euros worth of joint and several uh several bonds will be built on through series uh of modest additional EU issuance.
But transferring Italian government debt to the European Union, uh clearly there's no appetite for that.
Just help me on American history, because I remember Hamilton doing this, but I also read somewhere that a few years later some of the states were again in huge debt and used a second bailout.
And after that there was it helped, but then there was a no-bail out rule.
So my understanding today is that Washington is not going to help California in case California is in trouble.
Well, I I I don't know about today, but yes, your um recollection of American history is basically correct.
That um states began to borrow again, mainly starting in the 1820s and 1830s, in order to build railroads and capitalize banks that would lend to farmers.
And uh some of them over borrowed, agricultural prices declined in the late 1830s, and a number of state governments defaulted on their debts.
So there wasn't uh a second federal assumption of state debts, and in response to that unhappy experience, and partly in order to be able to borrow again in emergencies, states passed balanced budget laws or balanced budget uh constitutional amendments, not unlike the Black Zero rule in Germany, and what I learned about Illinois was also that Illinois has deficits.
So they have rules, but they don't stick to the rules.
No, California um had to impose uh significant spending cuts in response to the global financial crisis and the recession that followed it.
So public employees, including employees of the University of California, saw their salaries cut in response to that.
States like California also have some flexibility because they have rainy day funds.
So we've uh accumulated a large uh surplus that we invest that can be drawn down if there's a revenue shortfall.
What you describe in Illinois is the prospective problem that may materialize in the not too distant future, where pension liabilities come due, where pension payments promised to retired state employees stretched the budget to such an extent that the state can't pay.
We've had experiences in places like Orange County, California, where they invested their tax revenues imprudently.
Uh the investments went bust, and the county had to default in effect, didn't get bailed out by the state or the feds.
Which in my view is correct.
If you speculate or if you do poor investments, you should also take the risks.
On the defense of public debt, um, I listened to your example of the American states as that they were supporting farmers, and mainly they were supporting the build of railroads.
So I'm sure at the time being, people were saying that's a good purpose.
That's good to uh grow the economy, whatever.
So how do we define what is good public spending which justifies deficits?
We show lots of examples in the book of public investments that didn't pay off.
They tried to build a canal across the isthmus connecting the Atlantic and Pacific Oceans across Honduras in the 1860s, and they're still trying to finish that link today.
So it's tempting just to say good public debt is in the eye of the beholder, but I think we can do better than that.
So there are a number of countries ranging from the Netherlands to Chile that have independent fiscal agencies, experts who are independent from politics and evaluate investment projects, uh, the sustainability of debt.
No one can know for sure what the rate of return on an investment will be.
So we don't know the rate of return on public investments, and when companies invest, we don't know for sure the rate of return that will be realized on those investments.
But if qualified experts enjoy insulation from independence from politics, we have to rely on their judgments and and uh ideally uh operate on the basis of their judgments.
Actually, funny enough, we in Germany we have something similar.
We've got the so-called Bundesrechnungshof.
Um, unfortunately, they do lots of calculations, but politicians are not really listening to them.
So I know in the desonance is different.
I think they do even evaluate um uh election campaign programs and tell or speak about the financial implications.
And you're nodding.
That's good.
So basically, your book in defense of public debt is more like in defense of better public management.
Yeah, so the title of the book, you can blame the title of the book on me, but I I I think a book that was called In In Defense of Prudent Public Debt Management, or a book that had been entitled Uh A Balanced Analysis of Public Debt probably wouldn't have attracted the same attention.
That's a good point.
It's a fair point.
I know how to sell books, that's not the point.
Um, so in Europe, you know, I mean, we now have the discussion, we should have taken take on joint debt.
Not only if to um have more better military, but uh mainly also to um support the transformation in relation to the climate um challenge.
So this would be a case around a good purpose for more public debt.
Well, let me say two things about that.
Number one, if the German chancellor says we need to quickly ramp up military spending in order to meet this geopolitical emergency, then yes, the spending has to be ramped up more quickly than uh revenues will grow.
But then after the immediate emergency has passed and and the adjustment has been made, it's quite correct to have a discussion of whether to pay that debt down, to retire that debt through surpluses.
Second point would be uh the case of climate change abatement investments.
Should uh in in in investment in green technology and the green transition be financed by issuing debt, or alternatively be financed out of current revenues.
If it's kind of a one-time investment now, uh, and then the transition is more or less complete, then again, just like military spending, there may be an argument for financing it now by issuing a debt and then having that discussion about whether to retire, pay down the debt subsequently.
If you think our societies are going to be investing in fighting climate change every year for the foreseeable future, then we have to finance it out of current revenues because it's not a one-time investment.
And the other thing to think about is the rate of return on that investment.
So if you think it will pay for itself, uh economies that invest in climate change abatement might become the green technology leaders and be able to export their way to higher incomes, or that uh something along those lines, that the rate of return will be high, then it makes more sense to issue debt, which will be easily serviced and retired by that larger economy out of the revenues generated by that larger economy.
But if you think that these investments are socially necessary but might not have a high payoff in terms of economic growth, then taxes are going to have to be raised or other forms of spending are going to have to be cut in order to pay for them.
In a certain sense, what we are discussing is what kind of share of the GDP goes to the government.
And either it goes to the government in the current year, or it goes to the government over time when the government takes on the credits.
Did you also have a view around what the I don't know, reasonable size for the government sector is?
No.
I think that's for every country to decide.
One thing that I think we know from economic studies, uh, there's an uh economic historian at the University of California, Davis, Peter Lindert, who's done done a lot of work on this, is that there is no association, not no strong association between the size of government or the size of the welfare state on the one hand, and the health of the economy, the rate of growth of the economy on the other.
That different societies make different choices, and for various reasons, they some are able to reconcile large government with successful economic growth, others less so.
Part, you know, part of the answer is how you raise those revenues in efficient, non-distortive ways, or in ways that uh handicap efforts to grow.
And part of the answer is uh in terms of what that big government is spending on.
Our governments have a tendency to spend, in my view, and in Professor Lindert's view, too little on the young, too little on uh preschool and education and so forth, which translates into more productive workers and faster growth going forward, and too much on the old ones as one of the older people uh at this point in my life.
Uh I'm free to say that.
Uh pensioners vote and infants do not.
So that uh it's not simply the size of government, but what exactly government does.
I think first of all, a violent agreement and in Germany is the same.
It's as you can see, for example, that pensions are not touched, or so we all know that doesn't the pension system doesn't work this way.
So, but you would basically say if you want to have more social transfers, out of taxes.
If you have want to have a continuous investment in order to fight climate change, out of taxes.
Um, if we want to invest more into education of kids, of children, probably we could even take it on a credit, because it's kind of an investment which raises future income.
That that would be basically be my view.
So we had a debate in the US last year.
It's still going on about President Biden's build back better plan program and whether we could afford to incur additional public debt in order to uh finance it.
Senator Joe Manchin from West Virginia said no, we have too much debt already.
And others of us said that portion of this program that will fund early childhood education and other growth positive programs can prudently be debt financed.
So far, Senator Manchin is winning.
I think um probably on Europe, I heard you.
Ohne deine Hilfe wäre ich morgen noch nicht umgezogen, Marc.
Hier, nimm mal den Karton.
Marc?
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