Misinformed fear about financial markets and debt sustainability has clouded the debate on Europe’s new fiscal rules. This report unveils interactions between European financial markets and sovereign debt and proposes reforms to the European economic governance framework that preserve debt sustainability and enable public investments crucial to Europe’s future.
Europe faces serious environmental, economic and geopolitical challenges requiring bold reforms and significant public investment. Out of ill-informed fears of financial markets’ reaction to increased public debt, policymakers are building the new European fiscal rules around arbitrary debt limits, neglecting the positive impacts of qualitative public investment.
Such arbitrary numerical targets on debt reduction would limit policymakers’ ambitions and threaten Europe’s future by blocking some investments that are crucial for its resilience, sustainability and prosperity. A dangerous mistake: our report shows that the debt required to finance these investments can easily be absorbed by financial markets that care less about the debt stock of a country than about its economy’s overall strength and resilience.
This research report debunks common misconceptions about public debt and financial markets in relation to European fiscal rules and provides a practical approach to reforming the European economic governance framework.
Investors and credit rating agencies would welcome future-oriented fiscal rules incentivising Member States to increase their economic strength and resilience with future-oriented investments and reforms.
As for future generations, the debt resulting from such qualitative investments would weigh less on their shoulders than the future cost of inactions.