Opinion & Analysis

The Macroeconomics of Debt. Europe’s blind spot

Debt continues to grow around the globe, regularly creating cause for concern. Are today’s economies really nothing but a house of cards? The Covid pandemic has not helped matters: the debt of most Western governments has soared as a result. Will our governments go bankrupt, and who will foot the bill? While debt can be a catalyst for crisis, it is also crucial to economic growth, because one person’s debt liability is another’s debt claim. If nobody borrows, then nobody can set money aside. In a market economy, Aesop’s fable does not hold true: the ants need the grasshoppers.

As long as households want to save more than private agents are willing to borrow, governments not only can, but should, continue to take on debt. They are not just ‘borrowers of last resort’, they are also ‘insurers of last resort’. Faced with a future fraught with risks, borrowing gives governments a means of investing today to avert at least some of these risks and avoid taking on even more debt tomorrow. If they use their resources wisely, they will not go bankrupt.

This book tackles these issues in an original and thought-provoking way. By looking at the rise in debt from a macroeconomic and empirical viewpoint, the authors highlight the underlying forces while also pointing out the limits to public and private indebtedness.

Anton Brender, Florence Pisani and Emile Gagna are economists with CANDRIAM, a New York Life Investments Company, and also teach at Paris-Dauphine University. In collaboration with CEPS, they are publishing this book simultaneously in English and French (under the title Économie de la dette).

Download the full publication here