Workshop organised by the Directorate-General for Economic and Financial Affairs of the European Commission
"Public debt and economic growth"
Brussels, 3 December 2010
Deadline for electronic submissions extended - see below
The Directorate-General for Economic and Financial Affairs (DG ECFIN) of the European Commission is organising a one-day workshop on 3rd December 2010 in Brussels. The workshop will discuss the link between public debt and economic growth in view of the unprecedented rise in public indebtedness in developed economies.
Although the rise in public debt level was seen as an admissible cost in times of crisis (either through fiscal stimulus packages, through the work of automatic fiscal stabilisers and/or bank recapitalisation operations) the question of how higher government debt may affect the economy after the crisis is of significant policy relevance and calls for a better understanding of the various channels at stake and best policy strategies to follow in the aftermath of the global financial crisis. Despite the fact that fiscal policy's role in influencing the economy is a well-researched area no broad consensus has been formed regarding the long-run effects of government debt on growth in particular in a post-financial crisis context. Empirical evidence analysing the direct transmission channels of public debt (i.e., national savings, interest rates and risk premium) tend to support the mainstream view according to which public debt is a deterrent to economic growth although this evidence is far from being conclusive. Furthermore, the current increase in public debt originated in the global financial crisis following a period of fast rising asset prices and private credit expansion. As a consequence, the strength of the post-crisis growth performance will depend very much on restoring the credit channel and ensuring an efficient channelling of capital to productive private investment. In addition, given the size and pace of the public debt increase in the EU since 2007 and divergence across countries regarding the implications of this on debt servicing burden, optimal consolidation strategies might ponder the pros and cons of reducing or rather stabilising debt levels. Given the subject's policy relevance, the aim of the workshop is to distil the most relevant effects of public debt in the context of the current financial crisis and to highlight aspects specific to the EMU. This year's workshop will therefore focus on three main questions:
In theory the long-run impact of public debt on growth performance comes through a number of channels: higher public debt crowds out private investment through higher interest rates; private saving behaviour can also adjust to offset public dissaving leading to lower demand; finally, the financing of higher public debt might come through future higher distortionary taxes leading to lower economic growth. The evidence is still inconclusive on which of these (or others) channels plays the most important role in practice. The present situation in the EU is further complicated by the fact that the large increase in public debt originates in the crisis of the financial sector and can be thus thought as a transfer of liabilities from the private to the public sector following a period of fast rising private indebtedness. The economic impact of rising government debt thus also depends on the long-run consequences of public support to the banking sector, in particular, with a view to ensuring that the credit channel is efficiently restored and, in certain cases, on the deleveraging process undertaken in the private sector.
While the still fragile situation of EU economic growth and financial sector would point towards erring on the side of delaying consolidations, the presence of high levels of government debt adds to the urgency of consolidating, especially in countries facing high debt-servicing constraint. However, the existing literature on optimal taxation suggests that tax smoothing tends to be the appropriate reply to a sudden surge in public debt implying that, following such a shock, governments should aim at stabilising debt but not reducing it since the loss from higher distortionary taxes today would not be offset by the eventual gain from lower taxes once the debt has been reduced while prevailing policy prescriptions by contrast stress the need to reduce debt. This suggests that fiscal consolidation objectives and strategies should be tailored to countries’ specific situations, including regarding the risks associated with a fast increase in the cost of debt servicing. However, still little is known regarding the influence of country-specific characteristics on the optimal fiscal policies to follow in the wake of a large debt increase and a systemic financial crisis.
Two types of spill-over effects have specific policy relevance. First, with the introduction of the euro, national governments issue bonds in the same currency and thus are more likely to compete for funds than previously. It also means that an increase in one nation's public debt could raise not only the spread it has to pay compared to other members, but also the region-wide level of interest rates. Second, corporate bonds may also have to offer higher yields as they compete for the outstanding funds, which could lead to the classical case of public borrowing crowding out private capital, especially in countries already experiencing high risk premium on sovereign bonds. The latter in turn would also have an impact on economic growth. The relatively sparse empirical literature appears to confirm the spill-over effect between countries' government bonds although recent developments in the euro area suggest that such spillovers might go well beyond the linkages expected and observed since the launch of the euro and prior 2008. The evidence on the damaging impact of public debt on the private sector's financing cost is much weaker however and this can be partly explained in the European case by the low development of the corporate bond sector. However, little is known regarding the implications for private companies (e.g. in particular in the banking sector) of a sharp increase in public debt on their borrowing costs which ultimately may affect private investment and capital accumulation.
Against this background, the Commission invites the submission of contributions addressing the topics above.
The workshop will include 6 to 8 papers to be presented, followed by the comments of discussants and a general exchange of views among the participants.
The final papers will have to be original work created in response to this call for papers and should roughly be 15,000-20,000 words in length.
Selected authors will be required to send electronically a full draft of their paper to DG ECFIN by 1 November 2010 and to present it to the workshop. The final version of the paper should be submitted electronically by 31 January 2011.
In accordance with the conditions of the purchase order , the Commission intends to pay a fee of € 4,000 per paper and to cover traveland accommodation expenses as well as a daily allowance for one speaker per paper to present it at the workshop in Brussels, irrespective of whether the paper is authored or co-authored. The travel arrangements will be made via a travel agency, acting on behalf of the Commission.
We invite the submission of abstracts or annotated outlines (one to two pages) of preliminary papers related to the above mentioned issues. Papers can be co-authored .
Paper outlines together with a curriculum vitae (including the co-author's) and signed proxy forms should be submitted electronically to the e-mail address ECFIN-PUBLIC-DEBTANDGROWTH@ec.europa.eu, clearly mentioning in the subject line of the e-mail the topic of the paper.
This mailbox is reserved solely for submissions. Submissions sent to other mailboxes or to Commission staff cannot be accepted. No other communication should be addressed to this mailbox.
Deadline for submission
Due to an error in the e-mail address, it has been decided to extend the deadline for electronic submission until Wednesday 7 July 2010 10:00 CET.
The evaluation of the papers will be based on the following criteria:
The submissions will be evaluated and ranked. The selection procedure is expected to be completed by mid-July. Candidates will be informed in due time of the outcome of the selection procedure.
Conditional on the quality of the papers, they could be published in a volume collecting the workshop proceedings. The Commission will retain the copyright.