When you want to bury a file or when you want people to believe you are working to solve a problem you create a committee, it is a real French tradition. It is precisely what the government has just done about public indebtedness. Its composition is revealing: it will bring together former ministers who have contributed to increase it when they were in the government and economists who have not stopped to denounce the phenomenon and to make alarmist forecasts which revealed themselves wrong both about the cost of the debt, of the solvability of economic agents or the ability for the State to borrow.
The public indebtedness critic has reached its paroxysm during the euro crisis and the denunciation of the States supposed to spend too much. Greece was targeted along also the countries in Southern Europe; th was near to provoke the euro-zone blowout. For that reason, the euro-zone exit has been a central theme during the 2017 presidential election. Who would dare to pretend today that the euro is not an essential factor allowing to avoiding a financial crisis being added to the sanitary crisis? But, in the mean time, the priority was that, at any cost, public debt was to be reduced. The current turnaround is without any precedent because there is unanimity that its increase is the only way to soften the economic consequences of the pandemic. The look at public debt and the inconsistency of the successive positions taken both by economists and political leaders comes from three errors.
The first one comes from measure instruments. The States debt is compared to their GDP. But it is never convincing to compare a flow, the annual production of goods and services, to an asset, i.e. the debt total amount. What is important, it is the theoretical ability to reimburse it. But that one mainly depends of the accumulated wealth by these who are supposed, one day, to reimburse it, even if that concept is, as we will see, theoretical. Then, this has been completely ignored by European authorities when they agreed to elaborate the Growth and Stability Pact, now there is more than twenty years. What would have been included was the comparison between household financial saving rate and the public deficit during the relevant year. We would have concluded that French situation doesn’t present any risk because the country was accumulating the resources which would allow it to reimbursing, if there was a need, the borrowed money. The easiness with which the States have been able to finance the massive increase of their indebtedness, made necessary to cope with the pandemic, is partly coming from that point.
In Europe, the action of the European Central Bank, as elsewhere in the world which is affected, the same institutions, has also contributed to it. Through the subscription of public debt issuances, they made easier their subscription, along with keeping interest rates at a very low level. This action is more and more criticized, but, also there, without any reason. In the past, economic theory had explained that a too high increase of money supply, coming from central banks action, would provoke an inflationist crisis as what had been observed in Germany during the Twenties. But today world is different. The exercised pressure on all prices by competition and by innovation makes impossible any inflation comeback. We must recognize that the massive money injection since the beginning of the pandemic has not generated any inflationist consequence. Year on year, in France, inflation has only reached 0.2%.
The second error is about the supposed consequences on future generations. We frequently hear that we are transferring on our children the cost of our mistakes or, in the present case, of the sanitary crisis. But it is wrong. Future generations will also inherit of their parents accumulated wealth and it will be by large enough to reimburse that debt, if we suppose they have to reimburse it and not to, at their round, to transfer it to their own children. During the past, the good way to go through that constraint was inflation and the savings were the first victim during the Sixties and the Seventies. That saving is today protected and, so, it can be transmitted.
The third error is about the future debt charge. All finance bills these last years in France stated that this charge will heavily increase and constitute a threat. These forecasts revealed themselves wrong. Despite the very high increase of public indebtedness this year, next year charge will continue to decrease as it is doing for five years. The reason is double. This charge is the consequence of past years interest rates. We still pay today the 4% and even more rates carried by bonds issued by the State ten years ago. But every year these bonds are amortized and replaced by new ones carrying a much lower charge. The second one is that if rates had to rebound, it will be because monetary and economic policy would have permitted a high growth rebound, itself able to generate fiscal receipts easily allowing covering the supposed increase of that new charge. France has issued on financial markets in November more than 23 billion euro with Ten years rates fluctuating around -0.30%. Better, the spread with virtuous Germany has never been so low, 25 basis points, which show very well subscriber trust.
At last, we must admit the point that the States are different from private economic agents. The confusion is coming from political leaders which pretend to ignore that reality and who try to scare their citizens. Their motivations are well known and purely ideological. They consider that it is not the debt which is the problem but the expenditures and the State role in the economy which must be reduced. They are silent on this point by now because they are forced to admit that the only way to soften the consequences of the pandemic on the economy is the State intervention but they are not giving up their convictions.
The difference between a private borrower and the State is that the last one can almost eternally, history shows it, issue capital to finance its expenses and reimburse past issuances. The only limit, it is the internal saving capacity and financial markets trust if it is necessary to call on them. It is this loose of confidence which has, for example, provoked several crisis in emerging countries, in Asia twenty five years ago or periodically in Southern America. But the issue is not relevant in France and in Europe because the saving level is very high and the euro-zone balance of payments has a large surplus. And if a share of French public debt is detained by foreign investors, it is first a trust signal and also for technical reasons: bonds are frequently listed in Luxemburg, even if, at the end, they are owned by French savers.
As a total, it is not the level of the debt which is important but what the State does with borrowed money. The results of the rebound plan are expected with a lot of interest.