EU’s Bosses, Public Debt and Inflation…

Ordinary families receive wages and pay for normal stuff like food, clothes, hobbies, transport, holidays, utilities, insurance, and other household items. Bigger investments like a home or car are normally paid for by borrowing and that cost is then added on to the above list. 

It is called balancing the budget – you must live within your means…

Companies basically do the same and they do this by not having too much debt in relation to their equity. It is generally accepted that ordinary companies should keep the amount of debt smaller that the amount of their equity. Expected profits must be able to repay debts, but continuous increases in debt above the level of equity is a red flag, especially when profitability is under strain. 

Governments should also try to balance their budgets, in other words running basic services and investments should be covered by taxation and modest asset sales should be in balance. In Europe governments have agreed to keep public debt to around 60% of GDP over the long term and keep budget deficits to around a maximum of 4%.

All the above has finally disappeared with the last financial crisis and Covid-19. Our central banks are “buying” huge amounts of government and bank debts to keep interest rates low and the European Commission is planning to issue some €800 billion of debt over the next 5 years for which European taxpayers are responsible. Since the amounts being issued cannot be repaid by taxpayers in many less well-off countries, the more wealthy countries are on the hook. 

The graph below shows the current percentages of public debt to GDP inside Europe.

The amounts being borrowed are huge – at the moment the ECB’s total government and bank funding amounts to almost €6 trillion… €4 trillion of government bonds and €1.8 trillion of bank funding. The ECB says that they hold about 30% of the EU’s public debt.

Thus two entities have almost €7 trillion of debt that needs to be repaid. Assuming that the each person of Europe’s 440 million population is liable, then that liability is a modest €16 000. 

However, not everybody has these resources so let’s assume the liability is shared by households (2.5 people on average in each household) – then the liability is €40 000. 

Many countries, as seen above are already heavily in debt and cannot repay their liabilities – let’s assume that they amount to around 30% of all households in Europe. This means that the remaining 70% carry a liability of around €57 000 each.

Finland is one of the wealthy countries and this means that all Finnish households are taking on a liability of around €140 billion of debt (2 500 000 households times €57 000 debt liabilities)… which is a big sum and equal to our current public debt! Taking into account that the ECB already holds some 30% of our debt then the actual liability is around €100 billion. That is a big increase in the liabilities we carry in addition to our existing public debt that equals 70% of our GDP. Yes we do indeed need to increase the employment rate and create a more flexible labour market or end up like Greece. The young, women, and older folk need to get jobs, and fast. The wealthy need to be stopped avoiding taxes by evasive tax arrangements permitted by certain European countries, and Big Tech need to start paying taxes too if they want to operate here too.

Then same rough calculation works for all paying countries in Europe… Since you get what you pay for in Europe we must be vigilant about democracy and who represents us.

Our governments must spend wisely but the incoming European leaders could include right-wing extremists in France, Italy, Spain and Greece, in addition to our friends in Poland and Hungary. The matter of moral hazard is not a far-fetched idea that may infect the future  – just look at the mess banks have made with moral hazard.

Spending to support our weakened economies is important but controls need to be in place to stop the glut of public debt when necessary. Too much public debt creates hyperinflation without proper controls… just look at Germany 70 years ago, or at today’s war-torn countries in Africa, South America, and in the Middle East.  

Some economists have said that central bank holdings of government debt can be cancelled as a solution, although one leading economist, Professor Paul De Grauwe recently argued in a reply that even if the ECB did cancel this debt, nothing of substance would change economically for national governments because he states that debt cancellation effectively occurs when a central bank buys the debt. He warns about inflation and the danger it brings to private investors who hold fixed rate bonds.

In a recent interview Mr. Philip R. Lane, Member of the Executive Board of the ECB,was asked, “Some economists have called for the ECB to cancel sovereign debt at some point. What is your response to that?” 

He replied “The simple answer is: no, we cannot do that, because the Treaties don’t allow sovereign debt cancellation. But, regardless of the legal aspects, cancelling debt would not be a good idea in general, and the debate is a digression. We are seeing that governments are able to issue a lot of debt and to do it at low interest rates in a sustainable way.”

The German Constitutional Court is also looking hard at this situation – there is no easy or clear solution when a Pandemic hits us, or when banks take too many risks with out money, or when weak countries borrow too much…

Site Footer