How perverse public debt dynamics have been averted

The perverse public debt dynamics were clearly in evidence after the subprime crisis in Greece and in other euro-zone countries. The rise in the public debt ratio required a restrictive fiscal policy to try to restore fiscal solvency, but the restrictive fiscal policy led to a fall in activity which worsened public finances. Ultimately, fiscal solvency was not restored at all and the economy slipped back into recession. Why are these dynamics not appear ing today ? First, because the expansionary monetary policy is keeping long-term interest rates (sovereign risk premia) very low despite rising public debt ratios; Second, because fiscal solvency does not need to be restored thanks to the ECB’s purchases of the government bonds issued. There is no longer a vicious circle of public debt in the euro zone, at the cost of a loss of monetary policy control.