Alternative Fiscal Medicine?

BRUSSELS – Forget the fiscal cliff. The real issue is the fiscal mountain. According to the International Monetary Fund, the challenge of reducing the public debt/GDP ratio to a safe level is daunting for most advanced countries.

In Europe, many governments, having embarked on the path of fiscal consolidation while their economies were still weak, are now struggling with the growth consequences. As a result, debt stabilization seems to be an increasingly elusive target.

In the US, consolidation has barely begun. Because the private economy is now stronger, it may benefit from more auspicious growth conditions, but the magnitude of the fiscal retrenchment needed – more than ten percentage points of GDP, according to the IMF – is frightening. In Japan, nothing has been done thus far and the size of the required effort defies imagination.

All advanced-country governments are still officially committed to undergoing the pain of adjustment. But how many will become exhausted before implementing this program in full? Willingly or not, some may seek recourse to inflation or administrative measures aimed at trapping domestic savings into financing the state and keeping bond rates low (what economists call financial repression) – or, eventually, to outright debt restructuring.