Basically, there are two answers to the question of how the problem states of the eurozone can tackle their sovereign debt crises – austerity and growth. In my last blog I discussed the options and limits of tackling debt through austerity measures. This blog will look at what kind of chances there are for reducing debt through economic growth.
Economic growth and public finances
Economic growth means that the amount of goods and services produced for consumption or investment increases over time. Increased production generally brings higher employment. And a high level of productivity and a high employment rate are both crucially important for the long-term stability of government finances. Both lead to high government revenues and reduce the need for government expenditure to combat unemployment. Thus, as long as individual members of the eurozone remain uncompetitive on international markets for goods and services, they will suffer from high unemployment rates which have a negative impact on public finances and lead to further exacerbation of the debt crisis.
Budgetary consolidation and economic growth
When it comes to the indispensable stabilization of government budgets and reduction of government debt, I offer two recommendations. On the one hand, spending cuts should not affect those areas of governance which are absolutely vital for sharpening a country’s competitive edge. First and foremost, this means no cuts in expenditure on education. On the other hand, any move to stabilize government income should also aim at a reduction of the burden of labor. Labor is the main source of revenue for contributions-financed social security systems, a fact that is mirrored in high ancillary labor costs. Thus employment-friendly financing of the social security system would shift a greater portion of the burden to capital and to natural resources as production factors, and increasing taxation on them.
Limits of economic growth
Any attempt to reduce sovereign debt through increasing economic growth should also be aware of the limits of such a move. Forecasts predict that the world population, currently around the seven billion mark, will increase over the next 40 years to over nine billion. The consequences that a burgeoning population will have in terms of climate change and the availability of natural resources sooner or later will inevitably mean that the global economic dynamic will reach its absolute limits. Thus it is imperative that the transition to sustainable growth is effected as a matter of urgency. This mainly means a switch over to forms of production that conserve the environment and are sparing of natural resources. Financial support for structural change to a path of sustainable growth needs monetary incentives. And here in particular we need to think about higher financial levies on those activities which damage the environment and deplete natural resources – like increasing the price of CO2 emissions by placing a tax on them. At the same time such revenue would also contribute to the stabilization of government budgets and the reduction of government debt.
The need for a coherent stabilization strategy
Through higher government revenues and lower expenditures on combating unemployment, more vigorous economic growth can indeed play a role in reducing sovereign debt. At the same time, it is equally certain that global stabilization policies based solely on fuelling economic growth will lead to overuse of resources. The plundering of the planet this involves will leave a legacy of prohibitive follow-on costs for future generations whilst also in the middle- to long-term destroying the very basis on which human life subsists. Thus the challenge for financial policy-makers is to find an overall solution for the stabilization of public budgets in which such stabilization is not achieved at the cost of other problems of sustainability.
Revised and amended article from the March edition of “spotlight europe” entitled “Stability has a Price”.
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