A high level of public debt – diverts funds for servicing the debt (debt service) that are no longer available for productive spending – above all: Investments to adapt production to technical progress and thus to ensure the future viability of the economy and society – are no longer available; because the resources have been “breakfasted” (gobbled up) by the current age group at the expense of future generations, – leads to an increased interest rate level, which is triggered by the increased competition for investors (crowding-out), – which in turn has a detrimental effect on the growth dynamics of an economy, because companies now have to take out investment loans from banks at less favorable conditions; this makes it increasingly difficult to finance worthwhile investments; but also – the uncertainty that arises with rising government debt (insecurities: namely, the uncertainty about whether the government will repay the debt through spending cuts, tax increases, or inflation) has a direct impact on growth, insofar as it increases the uncertainty of entrepreneurial action; – reduces domestic income, insofar as the bonds are denominated in foreign currency; – narrows the scope for fiscal policy as debt service increases; in other words: the government cannot stimulate aggregate demand in a period of economic weakness, for example by supporting the unemployed, lowering the tax burden or publicly financed special buildings, which in turn also – restricts the government’s ability to finance infrastructure projects; this also triggers growth-inhibiting effects; – raises doubts about the sovereign’s creditworthiness above a certain debt level, which – as recent financial history has frequently demonstrated – can very quickly lead to sovereign default. – See fiscal drag, default, policy default, Rogoff study, sovereign bond, sovereign debt repayment, sovereign debt, consumption-reducing, sovereign debt pressure, sovereign debt-interest rate correlation. – See ECB Monthly Bulletin of June 2010, pp. 91 et seq. (costs and benefits of sovereign debt reduction; experience), pp. 94 et seq. (gross debt and financial assets in the euro area 1999-2009; overviews), ECB Annual Report 2010, pp. 83 et seq. (costs and benefits of fiscal consolidation; se), Financial Stability Report 2010, pp. 28 et seq. (debt-growth link), ECB Monthly Bulletin of April 2012, pp. 63 et seq. (detailed account of debt sustainability in relation to the euro area as a whole and individual members; many overviews), Financial Stability Report 1012, p. 21 f. (doubts about the debt sustainability of some EMU members lead to crisis of confidence), Cf. ECB Monthly Report of March 2013, p. 92 ff. (growth inhibition of high government debt; overviews; references), Deutsche Bundesbank Monthly Report of January 2014, p. 41 ff. (ways to overcome the crisis of confidence; many overviews; references).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
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