Consolidation, Eurobonds and Growth

Bjoern Hacker

Evaluation of the Debt Repayment Pact Proposed by Germany’s Council of Economic Experts

Since the German government is set on tough austerity measures for indebted states in response to the Eurozone crisis opponents’ calls for eurobonds and a Marshall Plan for Southern Europe are in vain. Recently, Germany’s Council of Economic Experts came up with an innovative proposal for solving the euro-crisis, a debt repayment pact. The basis of this pact is the temporary joint financing of that part of EMU member states’ public debt that exceeds the 60 per cent limit laid down in the Stability and Growth Pact. In particular, this could bring relief to countries with a very high debt level, such as Italy, since interest rates for the jointly guaranteed debts of the Pact would presumably be much lower than the yields currently required by the market.

In exchange for this joint debt financing the economic experts envisage strict consolidation measures and national debt brakes. At the invitation of the Friedrich-Ebert-Stiftung economists and policymakers intensively discussed the pros and cons of the debt repayment pact in two working group sessions. Toralf Pusch, economist at the Institut für Wirtschaftsforschung Halle, laid out the key points of the debate in a publication. According to Pusch, »[b]asically, the Pact manages to strike a balance between short-term relief as regards refinancing by crisis-hit states and prudent and long-term budget consolidation.« However, the counterproductive debt brakes and lack of economic stimulus would have to be improved upon. In his view, »[o]nly a combination of sustainable financial policy and a strengthening of the forces driving growth can safeguard lastingly low bond interest rates and robust growth prospects.«

Pusch, Toralf

Could a Debt Repayment Pact Lead Europe Out of the Crisis? / Toralf Pusch – Berlin: Friedrich-Ebert-Stiftung, International Policy Analysis, 2012, http://library.fes.de/pdf-files/id/ipa/09011.pdf