Public Debt and its potential Challenges for advanced Economies

Abstract

This paper analyzes the challenges of public debt from the point of view of advanced economies. It identifies austerity as well as the utilization of favorable investment conditions in a low-interest rate environment as the main positions in academia and politics to approach public debt. However, by conducting case studies on Japan's lost decades, the global financial crisis / eurozone crisis an COVID-19, the paper finds that there are no one-size-fits-all solutions towards debt. Although public debt accumulation in advanced economies is mainly driven by repeated crisis situations with weak recoveries instead of financial profligacy, many challenges remain in dealing with this debt accumulation. These include amongst others demographic change, ensuring successful public investment, keeping interest rates low through expansionary monetary policy in an environment of high inflation, avoiding doom loops, implementing efficient private sector regulation etc. Especially in the eurozone further fiscal integration while avoiding moral hazards will be a key challenge to ensure financial stability. The paper shows that public debt is an issue that advanced economies need to pay attention to. This is even more important in an environment of secular stagnation where monetary policy loses its importance against fiscal policy. However, a high public debt level as a main determinant of a country’s debt sustainability seems to have lost a certain degree of importance in recent years.