Πηγή: SEJ
By IYANATUL ISLAM and MARTINA HENGGE
July 12 2012
The current approach to fiscal austerity measures as a means of resolving the Eurozone sovereign debt crisis is widely regarded as ineffective. Economies, most notably in Southern Europe, undergoing the pain of fiscal austerity measures have not seen a significant reduction in long run borrowing costs (as measured by 10-year interest rates). Attaining the latter is important both for debt sustainability as well as kick-starting growth in the debt-distressed Eurozone economies. What went wrong?
There are many criticisms that one can level against the uncritical embrace of fiscal austerity measures as a response to sovereign debt crises. Here, we explore the widely held – but largely unsubstantiated – view among policy-makers that international capital markets populated by ‘bond vigilantes’ care largely or exclusively about national debts and deficits. Hence, cutting deficits in a resolute fashion in order to reduce public indebtedness is expected to be rewarded by lower borrowing costs because it will restore ‘market confidence’. Such reduced costs in turn are expected to spur investment, growth and creation of jobs. As a former President of the ECB put it, ‘At present, a major problem is the lack of confidence on the part of households, firms, savers and investors who feel that fiscal policies are not sound and sustainable’.[1] The British Prime Minister delineates the perceived linkages between interest rates, debts and deficits quite clearly: ‘If markets don’t believe you are serious about dealing with your debts, your interest rates rocket and your economy shrinks’.[2]
These pronouncements by influential policy-makers (both past and present) overlook the fact that multiple studies show that formal assessments of sovereign credit worthiness by credit rating agencies routinely include growth indicators in addition to measures of debts and deficits.[3] What is perhaps less well known is that growth has a more significant impact on sovereign default risks than debts and deficits.[4] The implication is that that cutting deficits to reduce public debt might be self-defeating given that such actions typically reduce growth raising doubts among ‘bond vigilantes’ about the sustainability of fiscal austerity measures.
We show in Figure 1, based on a sample of observations for Eurozone economies, that there is an expected negative correlation between annual growth rates and long run borrowing costs.Figure 2 exhibits the expected positive correlation between long run interest rates and annual changes in gross debt-to-GDP ratios. On the other hand, our attempt to plot an association between annual declines in structural deficits and long run interest rates yields the seemingly counter-intuitive pattern that fiscal tightening is not associated with lower interest rates – seeFigure 3.
We combine the information in the aforementioned figures into a simple regression estimate. We find that a one percentage point increase in the GDP growth rate is associated with a statistically significant decrease in borrowing costs of 0.75 percentage points. A one percentage point increase in the annual debt-to-GDP ratio, on the other hand, has a comparatively smaller impact on long run interest rates (of the order of 0.26 percentage points). In addition, we could not ascertain any statistically significant impact of changes in fiscal deficits on long run interest rates. It thus follows that the current pursuit of fiscal austerity measures in the case of the Eurozone economies is unlikely to accomplish its key objective of reducing borrowing costs on a sustainable basis. It also supports the contention of those who advocate the need to focus on growth in dealing with the debt-distressed economies of the Eurozone.
Figure 1
Eurozone – GDP growth rates are negatively correlated with 10 year interest rates, 2010-2011
Sources: OECD Key Short-Term Economic Indicators (June 2012) and IMF World Economic Outlook (April 2012).
Figure 2
Eurozone – higher increases in the debt-to-GDP ratio are associated with higher interest rates, 2010-2011
Sources: OECD Key Short-Term Economic Indicators (June 2012) and IMF World Economic Outlook (April 2012).Figure 3
Eurozone – fiscal tightening is not associated with lower long run interest rates, 2010-2011
Sources: OECD Key Short-Term Economic Indicators (June 2012) and IMF World Economic Outlook (April 2012).[1] See European Central Bank, Interview with Jean-Claude Tritchet, President of the ECB, and Liberation, July 8, 2010
[2] David Cameron, ‘A Speech on the Economy,’ Thursday, May 17, 2012 available at http://www.number10.gov.uk/news/pm-economy-speech/
[3] See, for example, Alfonso, A., Gomes, P. and Rother, P. (2011) ‘Short and Long-run Determinants of Sovereign Debt Credit Ratings’, International Journal of Finance and Economics, 16(1), 1-15. See also European Parliament (2011) Rating agencies – Role and influence of their sovereign credit risk assessment in the euro area, Monetary Dialogue December 2011.
[4] Cottarelli, C. and Jaramillo, L. (2012) ‘Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies’ IMF Working Paper 12/137.
Iyanatul (‘Yan’) Islam, a Cambridge- educated economist, is currently Chief, Country Employment Policy Unit, Employment Policy Department, ILO Geneva. Martina Hengge, a graduate of the University of St Andrews, is currently working on macroeconomic and labour market policies for the Country Employment Policy Unit at the International Labour Office (Geneva).
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