UPV - COVID-19's Legacy Of High Public Debt In Europe: Prospects And Problems

• High public debts in the wake of COVID-19 pandemic will present a vulnerability for European governments with strong incentives to stabilize and lower their debt-to-GDP ratios.
• Changes in public debt as a share of GDP are determined by the primary balance (balance without interest payments), the difference between nominal growth and interest payments (snowball effect), and deficit-debt-adjustment (also called stock-flow adjustment), which consists of financial transactions not included in the general fiscal balance.
• Since the 1990s, European governments have sought to lower debt-to-GDP ratios primarily through improvements in the primary balance (austerity), although this weighs down on growth and has had mixed results across economies over the last decade.
• Given weak potential growth rates across much of Europe, due to adverse demographics and other structural impediments, and the potential political fall-out from renewed austerity, more unconventional measures may be explored to help with the high public debt.

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