Excess savings and public debt sustainability in the euro zone

Since 2012, the euro zone has had a significant savings surplus due mainly to a fall in private sector investment. The argument can therefore be made that the fiscal deficit should be increased until this savings surplus is absorbed, which would allow public spending to increase . Unfortunately, this argument is wrong. If the public debt increases, even if, symmetrically, private debt decreases, public debt sustainability may no longer be ensured: excessive public debt can lead to a public debt crisis even if private debt declines. In an economy with two economic agents, if one has high and rising debt and the other has low and falling debt, the former has a savings shortfall and the latter has excess savings; the former may default even though the economy’s overall debt ratio is not rising . This applies to the debt of governments, but not to that of the European Commission at present. To absorb the euro zone’s savings surplus, we can therefore imagine: Additional public investment financed by tax; European Commission borrowing.