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Our Deep Debt Future

TILBURG, NETHERLANDS – The 1980’s was the decade in which high inflation was supposedly consigned to the dustbin of history, while the 1990’s were all about the so-called new economy. Governor Mervyn King of the Bank of England once called it the NICE decade (No Inflation, Continuing Expansion) – a time when the economy reached the promised land of high growth and price stability.

The following decade turned out to be one of, first, the war on terror and, later, the worst financial and economic crisis in almost a century – a time when virtually every developed economy experienced a long and deep recession.

The war against terror is still raging. But, owing to the financial and economic crisis, the current decade will be remembered as the decade of public debt, and in some countries or regions, maybe even the decade of permanent fiscal derailment if nothing is done. In the European Union, for example, public debt in the most important eurozone and EU countries would rise to 100% of GDP or more in the next ten years alone.

Of course, something will be done, but it will most likely not be enough. Doing enough would require reducing annual budget deficits by 0.5% of GDP every year during the coming decade just to improve the sustainability of government debt on average. That effect, however, has to come on top of withdrawing the current fiscal stimulus that all countries have implemented.