Growth in a time of debt: irrelevant to the eurozone experience

by George Hatjoullis

An interesting controversy has emerged about the academic foundations of the thrust of global, notably eurozone, fiscal policy. A paper by Carmen M. Reinhart and Kenneth S. Rogoff ‘Growth in a time of debt’ (, is often quoted by policy makers to justify severe austerity in order to keep national debt levels below 90% of GDP. The implication of this study is that if debt levels are higher than 90% of GDP then fiscal tightening (a reduction in the public sector deficit or increase in the surplus) will not have a severe impact on GDP growth and over time will have a positive impact. Not hard to see why the troika liked this paper and were fond of citing it. (see for example ( and the second from last paragraph on page 3).

A critique of the research [Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo ff Thomas Herndon | Michael Ash | Robert Pollin | 4/15/2013 Download 418 kB] demonstrates that cumulative errors and omissions distorted their results and overstated the necessary negative impact of high debt levels on growth. The implication is that austerity from such high debt levels is likely to have a more severe impact on GDP growth than has frequently been asserted by policy makers.

There is a very good discussion of the issues in FT Alphaville ( which is recommended reading. In particular FT Alphaville asks the question whether this research drove policy or merely provided a post hoc justification for what policy makers were going to do in any event. My view is that most definitely the latter is the case.

First, note that Rogoff is an ex-IMF economist. The idea that high national debt levels constrain GDP growth pre-dates Reinhart and Rogoff. This paper did not introduce the idea and reflects two economists already inclined to a view that was widely held. Second, as I have argued in several blogs but notably in Cyprus a special case for the eurozone; moral hazard revisited the austerity drive in the eurozone was motivated by Berlin’s desire to eliminate moral hazard from the euro project. In particular I have argued that the pain of austerity was deemed a necessary part of the elimination process by Berlin. This is not entirely consistent with subscribing to an academic view that there would be little or no economic pain.

Reinhart and Rogoff reply .

Even if the Reinhart and Rogoff result is valid it is irrelevant to the eurozone. It applies, if it applies at all, to single nation states having complete freedom over monetary policy and their exchange rate. It has not been re-examined in the context of member states of a monetary union applying synchronised austerity across the Union. In short, it is irrelevant to the eurozone experience.