What Paths Could Be Taken to Best Escape Falling into the Debt Trap?

Olivier Klein * Professeur affilié, notamment cours de macroéconomie financière et cours de politique monétaire, co-responsable de la Majeure et du Master de Financial Economics, HEC ; directeur général, BRED. Contact : olivier.klein@bred.fr.


There are false leads, and others to consider, but no obvious or easy solution.

Among the false leads defended by certain economists is the idea that the debt is sustainable, no matter the amount, for a very extended period of time. Or, by some others, cancelling it. Two opposite solutions. Tax increases as well as a mandatory government bond issue are also two non-solutions that would have adverse effects notably on both supply and demand.

Regarding the possible paths for exiting the debt trap through equity, firstly with respect to private debt, measures favouring capital increases by companies are necessary.

For the public debt, the central banks will have to be able to continue to roll over the Covid debt for a sufficiently long period.

Last but not least, while maintaining policies to support demand until the return of normalised growth, the growth potential must be increased, through the implementation of structural policies, starting with the pension and unemployment reforms. Stronger nominal growth will gradually lead to a reduction in the government debt ratio, through both its numerator and denominator.


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Footnotes

1   Le raisonnement est également valable pour les agents privés.


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