A question that I asked at the Bank of America Merrill Lynch conference in Tokyo:
Debt sustainability depends on the debt-to-GDP ratio--not just on the debt numerator but on the GDP denominator as well. With credible sovereigns able to borrow at zero, effects on the numerator are small. With multipliers larger than anticipated, effects on the denominator are large. Currently, with historically large multipliers and historically low interest rates, it appears likely that the effects on the denominator dominates, and that for credit-worthy sovereigns austerity policies both reduce short-term output and increase the magnitude of long-run debt-financing problems.
US Treasury Undersecretary Lael Brainard says things like: "Europe urgently needs to pursue aggressively pro-growth policies." I hear that and I hear a call for:
- Regulatory union
- Fiscal backstops
- Reduced public spending in Southern Europe
- Higher government spending in Northern Europe to offset the austerity drag, and
- Faster rates of price increase in Northern Europe.
But this is not what I hear from the panel.
Is it that the aggressive pursuit of pro-growth policies is not so urgent?
Or is it that the panelists have a different view of what urgent and aggressive pro-growth policies are than I do?
