Debt to the Rescue

Abstract

AbstractThe subprime and Eurozone crises were the largest peacetime economic disruptions since the Great Depression of the 1930s. Aware of the precedent, governments responded with increases in spending funded by sovereign debt issuance. Central banks, though independent, supported the effort by purchasing government bonds. But even before the crisis had passed, political consensus for deficit spending gave way to the view that a return to austerity was urgent. Additional borrowing, the reasoning went, augured a repeat of the credit cycle behind the earlier crisis, and in any case would be ineffective, threaten the stability of public finances, and burden future generations. In fact, premature austerity and delayed debt restructuring slowed recovery from the crisis. In Europe, this approach put the political and economic stability of the European Union at risk. The silver lining was that the next time the world was faced with an existential crisis, in 2020, these lessons had been learned.