Europe’s Irrelevant Austerity Debate
The debate about austerity and the cost of high public-debt levels misses a key point: public debt owed to foreigners is different from debt owed to residents. And that distinction is particularly important in the context of the euro crisis, which the evidence confirms is not really about sovereign debt, but about foreign debt.
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BRUSSELS – The most visible symptom of the crisis in the eurozone has been the high and variable risk premiums that its peripheral countries now must pay on their public debt. Moreover, an influential paper by the American economists Carmen Reinhart and Kenneth Rogoff suggests that economic growth falls sharply when a country’s public debt rises above 90% of GDP. So the policy prescription for solving the crisis seems simple: austerity. Fiscal deficits must be cut to reduce debt levels.