How to pay back the debt? 'We are still in the middle of the crisis!'

De Volkskrant
Erasmus School of Economics

What to do with the trillion-dollar debt that governments are currently throwing themselves in to save the economy? And how are we going to pay this bill? In an interview with Dutch newspaper De Volkskrant, Bas Jacobs, Professor of Public Economics at Erasmus School of Economics, explains what he believes is the best approach.  

Still in the middle of the crisis

Jacobs thinks the approach of the interview is far too premature. ‘We have to be careful not to make the same mistake as in 2010 - when we thought we had already mastered the credit and euro crisis – and step on the brakes while the economy has barely recovered. The blow we are experiencing now is even more severe than in 2008. When I look at the statistics, the chills run down my spine: 15% unemployment in the US! The IMF estimates a global contraction of 3% and in the Netherlands the GDP has shrunk by 1.7% in the first quarter. And then immediately the discussion: how are we going to pay back those debts? We are still in the middle of the crisis!’

Rising government debts

According to Jacobs, monetary financing is not yet the solution. ‘The question is whether it is necessary. Monetary financing can be useful as a last resort, but I have not reached the point where I believe public debts in some euro countries are so high they can no longer borrow money on the capital market. Italy pays 1.4% interest on 10-year government bonds, which is very little from a historical perspective. Thanks to the negative interest rate of -0.1% on new loans, the Netherlands even receives money from borrowing money. I think that the government debts, especially with the current low interest rates, can still rise quite a bit, even in the case of Italy.’

Debt restructuring

According to Jacobs, debt restructuring is a better option. This means that the lenders of the countries have to bite the bullet first and write off their loans. But who will have to incur the losses then? ‘Replay the video of the rescue of Greece during the euro crisis,’ says Jacobs. ‘We actually only bailed out the banks, while Greece still has an unsustainable public debt and a moderately functioning economy. This is not something we should do again. Systemic banks experiencing problems should be helped and recapitalised after a write-off of rotten assets, while non-systemic banks should be closed.’

No political statements

Another question is whether a tax increase is needed to pay the corona debts. According to Jacobs, one third should be financed through higher taxes, and two thirds through cutbacks. Jacobs, however, does not want to make any statements about who should bear the bigger part of this burden. ‘I believe that as an economist, you can’t really make good statements about this. The tax level is determined by how big you think the public sector should be. Do you believe we should put the burden on the rich? This would be a good solution for left-wing parties, but not necessarily for right-wing parties. However, as an economist it is very difficult to make any statements about this without becoming political and I prefer not to do so.’

Not irreplaceable

The interview ends with the question whether the government should impose additional requirements on companies now that they can apply for a second round of government aid. ‘I think it is important to start thinking about a number of business economics-related conditions to ensure that the public money is properly spent,’ says Jacobs. ‘For example, seeking help from shareholders before knocking on the door of the government. In addition, we should not think that certain companies such as KLM are irreplaceable. KLM is now receiving 2 to 4 billion euros while our museums, theatres and other cultural institutions are risking going bankrupt. When a national pride such as KLM is at stake, the wallet is being pulled wide open, but I hear relatively few people talking about essential things like our cultural heritage.’

Professor
More information

The full interview from De Volkskrant, 4 June 2020, can be found here (in Dutch).