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Juncal CuñadoProfessor of the School Economics and Business Administration, University of Navarra, Spain.

Growth and public debt

Sat, 20 Feb 2010 10:15:23 +0000 Published in Expansion

From agreement with the latest data published by the high school National Statistics Office, the Spanish Economics has suffered a quarter-on-quarter fall of 0.1% in the fourth quarter of 2009, which means an annual fall of 3.6%. In spite of the fact that the data show that Spain has not yet come out of the recession, and even more, that it is the only G-20 country that has not done so, these data have been taken with certain optimism by the Government, from where they have pointed out that the Spanish Economics is about to come out of the recession, and at the same time, they have ruled out a possible relapse.

The serious turbulences experienced by our Economics last week seem to have been forgotten, which, let us remember, led to a 7.7% drop in the Ibex and an increase in the spread between Spanish and German bonds, which rose to over 100 points. The EU's financial aid plan for Greece has brought calm back to the financial markets, at least momentarily, and pending the details of the measures to be adopted. However, it should not be forgotten that behind this market distrust are, among other factors, the high fiscal deficit and public debt figures reached by the economies, figures that have skyrocketed with the crisis. Thus, the fiscal stimulus plans that have been implemented after the crisis explain how our Economics has gone from a public surplus of 2.3% of GDP in 2007 to a deficit of 9.8% in 2010. Furthermore, agreement with the Budgetary Stability Plan
2010-2013, public debt will reach a level of 74.3% in 2012 (from a level of 36.2% in 2007).

These figures are not exclusive to our Economics, but are a generalized phenomenon, which is affecting developed economies to a greater extent than emerging ones. Thus, according to agreement with data of the International Monetary Fund, the percentage of debt over the average GDP of the G-20 countries will reach 86% in 2014 (and 120% in the most developed G-20 countries).

Why are these debt levels so important? What have we learned from past crises? In a recent article graduate "Growth in a Time of Debt" and published as a paper on work in the National Bureau of Economic Research (issue 15639, January 2010), Carmen Reinhart and Kenneth Rogoff analyze the relationship between economic growth and public debt using data for 44 countries over the period 1850-2009, and find a significant relationship between public debt levels and economic growth. They show that countries facing public debt levels above 90% of GDP grow at a rate of up to two to three percentage points lower than countries with debt levels below 30% over the following two to three years, from average.

Risk of relapse

The fees of GDP growth and the percentage of public debt over GDP (which measures the sustainability of public finances) are two variables that are in the spotlight of any Economics, and even more so at a time of crisis such as the present one. The relationship between them can be bidirectional. On the one hand, negative GDP growth fees leads to significant increases in the public deficit and public debt, so the fact that the debt of a Economics in crisis should not be a cause for concern.
On the other hand, however, one has to be careful with the level of debt, as high levels of debt can lead to lower fees GDP growth in the medium term deadline. In other words, high levels of public debt could be the cause of a slower recovery, or even, relapse of our Economics. So, be careful, because the risk of relapse still exists. It is not necessary to reach "unsustainable" levels of public debt such as those in Greece for the recovery of the Spanish Economics to be delayed in time.