Wednesday, 13 April 2022

Greed, Grievance & Putin´s War

 From Putin´s abstruse historical perspective, Russia´s military invasion of Ukraine is more akin to civil war than to a war between two sovereign nations. Putin´s war has been explained by either his greed or by Russia´s grievance as NATO has expanded East closer to Russia´s border over the past decades. “No grand theory can explain the Ukraine crisis”?[1] Take a little one then[2], the seminal Collier-Hoeffler Model, a model well known in conflict and development research[3]. It suggests to emphasize Putin´s greed and to act accordingly through aiming at his wealth via targeting his oligarch trustees.

Using a rich dataset of wars (mostly for Africa) during 1960–99, Paul Collier & Anke Hoeffler found political and social variables that are most obviously related to grievances had less explanatory power than economic variables. For the current Ukraine context, it means that we should give little credence to views that look at NATO´s enlargement as a root cause for Russia´s military invasion(s). Rather, we should emphasize economic motives for Putin´s war and identify targeted economic instruments to stop him, beyond and above rapid military equipment of Ukraine to withstand brutal Russian assault.

Putin has excelled at manipulating the psychology of grievance. For years, he cultivated a narrative of humiliation by the West. That narrative supported Russia´s occupation of Crimea in 2014, when Putin´s popularity levels shot up to their highest ever levels. Again, Putin's approval rating seems to have soared since he sent troops into Ukraine late February 2022. Economic sanctions by the West hit the population, not Putin, and are adding to Putin´s popularity.

Large-group psychology and social conflict have been investigated by psychiatrist Vamik Volkan who conducted fieldwork in regions of war and unrest. Volkan found that if societies don’t work through their sense of loss (of power, status, or prestige) through a process of mourning, it can become central to group identity – which in turn makes them vulnerable to manipulation by destructive leaders who play on old wounds. Apart from Putin, Serbia´s Milosevic and Trump (MAGA) are similar cases[4].

No doubt, Putin is greedy (and very wealthy).[5] According to financier Bill Browder,  since “Khodorkovsky's conviction (in 2003), Russian oligarchs went to Putin and asked him what they needed to do to avoid sitting in the same cage as Khodorkovsky. From what followed, it appeared that Putin's answer was, "50%" He wasn't saying 50% for the Russian government or the presidential administration of Russia, but 50% for Vladimir Putin personally."

In Ukraine, Putin´s greed can be satisfied by the extortion of the victim´s natural resources (cereals, oilseeds, gas) because annexation would make Russia a world leading supplier of fossile energy and staple food. A recent Information Note published by FAO (Food and Agriculture Organization of the UN) has highlighted the critical role that Russia and Ukraine play in global agriculture. In 2021, both countries combined held major percentage shares of global exports in wheat, barley and sunflowerseed oil (between 30 and 60%). The annexation of Ukraine would give Putin a huge extortion potential as a quasi monopolist over staple food items, most crucially important in poor Africa and Asia.

The annexation of Ukraine would also consolidate Russia´s de facto monopoly of gas exports to Europe as it would capture the all important pipeline North Stream 1 run by Ukraine´s Naftogaz. Russia has been also denying Central Asian countries access to its own gas transport network, and consequently depriving them of access to Ukrainian transport towards Europe.

Sanctions are unlikely to be the best way to stop Putin. Bill Browder (the largest foreign investor in Russia until 2005, and now a leading campaigner to expose Russia's corruption and human rights abuses), likens broad economic sanctions to nearly killing the patient to target the cancer. Instead, he has suggested to sanction Putin´s oligarch trustees, probably along international adoption of the US Magnitzky Act ((named after his murdered Russian lawyer, Sergei Magnitsky).

Since Russia's aggression against Ukraine, Europeans have already frozen billions in assets belonging to oligarchs. Recently, the EU Commission drew up an initial balance sheet: By April 8, assets of oligarchs and companies worth a total of 30 billion euros had been frozen in the member states. According to the Commission, these include ships, helicopters, real estate and works of art worth almost 6.7 billion euros. In addition, transactions worth around 200 billion euros had been blocked.

Some countries are obviously further along than Germany in tracking Putin´s Mafia. Italy has long recognized that fighting anti-money laundering is a prerequisite for successfully combating the Mafia. Germany, by contrast, is a notorious bad performer in reviews by the experts of the Financial Action Task Force (FATF)[6]. Experience in the fight against organized crime also helps Italy freeze the assets of Russian oligarchs, with the powerful Guardia di Finanza having far-reaching rights.

So apart from military resistance and secret service sabotage against Putin: Make Putin Poor Again!

[1] Janan Ganesh (2022), “No grand theory can explain the Ukraine crisis”, Financial Times, 12. April.

[2] Paul Collier & Anke Hoeffler (2004), “Greed and grievance in civil war”, Oxford Economic Papers 56, 563–595.

[3] A seminal paper on violent civil wars, has been the focus of much of the greed-grievance debate. The model argues that certain natural resources such as oil are tied to increased likelihood of conflict onset. The links between natural resources and conflict were confirmed by the data, apart from the level of per capita income and the rate of economic growth. Primary commodity dependence raises the risk of civil war exponentially until it peaks with exports at around 30 percent of gross domestic product (GDP).

[4] Alex Evans (2022), “Putin and the psychology of grievance”, The Article, 1st April.

[6] The FATF is affiliated with the Organization for Economic Cooperation and Development (OECD) in Paris and is considered an important international body for combating money laundering and terrorist financing.

Monday, 14 March 2022

After Putin´s War Crimes in Ukraine: Rupture and Sanctions after Shifting Wealth


Russia is now as totalitarian as is China. On 24th February, Putin´s Russia has invaded Ukraine, resorting to murderous shelling while Ukraine was fighting for its freedom. This followed upon Russia´s invasion of Crimea and the seizure of Ukrine´s Eastern Donetsk and Luhansk regions in 2014.

For at least a decade, Putin has built his country´s food self-sufficiency by doubling its grain production since 2012. The two inputs you need to sustain a long war are grains and energy - of which Russia has plenty. The current account balance was switched from negative to positive during that period, resulting in a built-up of a war chest at Russia´s Central Bank, with foreign exchange held in China (12%) and gold reserves (22%) vaulted at home; just 6.5% of Russia´s FX reserves were recently held in the US.

Xi Jinping has been the paramount leader of China since 2012; he has hardened his grip ever since. He has suppressed democracy movements in Hong Kong, threatened Taiwan and other neighbours. Last not least, he forced internments, mass sterilisations, forced assimilation, "re-education", and coercion of detained Uyghurs to work in factories.

In 2022, geopolitical rupture looms. Global governance is disintegrating into an American-dominated bloc and a Chinese-dominated bloc, with Russia and the EU countries as junior partners. Such hypothesis was pronounced by Clemens Fuest (IFO Munich) and by Martin Wolf (FT)[1]. Will economic divisions follow? The link between geopolitical and economic division will be calibrated by sanctions, to the extent they are effective.

The BRICS and much of the “Global South”, a risk overlooked by Western observers, might opt for the China-dominated bloc. With a deep and prolonged division between the west and a bloc centred on China and Russia, economic divisions will follow. Lack of mutual trust and humanitarian concerns call for disintegration of the world economy after four decades of intense globalisation. Military buildup will shrink the peace dividend for the world; just as it did in Putin´s Russia except for the super rich oligarchs over the past two decades.

Both China and Russia are important drivers of the BRICS (official website)[2], joint with Brazil, India and South Africa. The BRICS, except South Africa, lead the list of countries with the highest foreign exchange (FX) reserves, ahead of Germany. Combined, they have built up official FX reserves worth round $ 6 trn, mostly over the last two decades. Approved at the 2014 BRIC summit in Brazil, the BRICS Contingent Reserve Arrangement (CRA) provides protection against global liquidity pressures. Since the 2015 BRICS summit in Russia, a BRICS payment system conceived as an alternative to the SWIFT system has been established and largely backed by China: Cross-Border Interbank Payment System (CIPS).

Despite a growing membership, the OECD share in world GDP expressed in Purchasing Power Parities (PPPs) stabilised around 50% between 2011 and 2017 (latest benchmark year), according to the International Comparison Program (ICP). Similarly, the share of large emerging economies (China, Brazil, India, Indonesia, the Russian Federation and South Africa) also stabilised at around 30% of world GDP[3].

Political scientist Rachel S. Salzman (SAIS, Johns Hopkins U) has documented in a fascinating study Russia´s leadership in establishing the BRICS group[4]. The desire to end US hegemony, rewrite rules and build new institutions is a shared commitment of the group. In a time of alienation from the Euro-Atlantic world, BRICS provides both China and Russia with international support.

Sanctions will drive geopolitical rupture and economic division on a global scale. To which extent is less certain than our own propaganda wants us to believe.  Notably the exclusion of Russian banks from SWIFT was hailed by banner-waving economists and politicians as the ´nuclear´ sanction to bring Putin quickly down. However, Alistair Milne, Professor of Financial Economics at Loughborough University (UK) has convincingly explained that throwing Russia out of SWIFT will be quite ineffective, unlike freezing the reserve ssets of the Central Bank of Russia that include gold reserves held at home[5].

The UN General Assembly Resolution against Russia on 2nd March was an eye opener for many. To be sure, the “world wants an end to the tremendous human suffering in Ukraine” (UN SG Antonio Guterres). Only 141 of the total 198 UN member states of the UN General Assembly adopted a resolution demanding that Russia immediately end its military operations in Ukraine. Five countries - Belarus, North Korea, Eritrea, Russia and Syria - voted against it, while 35 abstained. Africa´s voting behaviour must be a special downer for DAC donors. Half of the (too) many African countries did not condemm Russia´s attack on Ukraine. They rather preferred to abstain, go to be absent, and Eritra was one of the very few countries to vote against the UN resolution.

The West may have thought that the atrocities commited in Ukraine might entirely isolate Russia. However, it may have overlooked to what extent non-Western countries have intensified economic links aside from the West and how that may have created political ties, supported by new institutions not ruled by the US. In short, the West has ignored Shifting Wealth[6].

[1] Clemens Fuest (2022), “Economic Consequences of the Russian Invasion of Ukraine”, ifo Viewpoint 234, 4th March: Martin Wolf (2022), “Putin has reignited the conflict between tyranny and liberal democracy”, FT, 1st March.

[2] The official website by mid March prominently displayed ´breaking news´ such as “Russian Banks Turn to Chinese Payment Solution in Wake of Sanctions”, or “Dr Reddy's (Indian pharmaceutical major) Plans 'Business Continuity' in Russia”.


[4] Rachel S. Salzman (2019), Russia, BRICS, and the Disruption of Global Order, Georgetown University Press.

Wednesday, 5 May 2021

Germany´s Green NeoCons


On her way to becoming chancellor, Germany´s Green Party's Annalena Baerbock enjoys strong tailwinds. Election polls for the 2021 federal election remain positive for the Greens, and the public media are blowing the horns, too. The development of the Greens from original pacifism of the founding generation to bellicose neo-conservatism (along the lines of Albright, Bolton, Cheney or Wolfowitz) is cause for concern.

The Greens are mainly targeting the undisputedly blatant human rights violations in China and Russia. However, one hears little from the Greens about human rights violations in Egypt, India, Israel, Saudi Arabia, the United Arab Emirates or in the Western countries themselves[1].

The threat of sanctions is a popular reflex of moral indignation. If you search Google for "Baerbock Sanktionen" (Baerbock sanctions), about 76300 results are retrieved in 0.36 seconds. Key statements can be found in Baerbock's interview with the Frankfurter Allgemeine Sonntagszeitung:

- On Russia: "Moreover, there are sanctions as tough measures, but they are permanently thwarted because the German government is sticking to the Kremlin's most important prestige project, the Nord Stream 2 gas pipeline. I would have withdrawn political support for Nord Stream 2 long ago."

- On China: "a different approach to authoritarian regimes is a key issue for me in a future German government - for our security and our values. We are currently in a contest of systems: authoritarian forces versus liberal democracies. This is also about China. The New Silk Road project, with its global direct investments in infrastructure or energy networks, is not just about niceties. This is hard-core power politics."

The candidate does not specify the threatened sanctions. But no one should say afterwards that they knew nothing about it. Foreign Minister Heiko Maas (SPD) has already spoken of the "confrontation cries" of the Greens. The drumbeat of the candidate for chancellor suggests that the Green leadership is not sufficiently addressing the following questions:

1) Which sanctions against China or Russia are effective at all? Sanctions ease the pressure of conscience, but their effectiveness is doubted. An earlier study (GC Hufbauer, JJ Schott, KA Elliott, 1990) of sanctions in 115 countries since 1915 - by what is now the Peterson Institute for International Economics - found that economic sanctions were inadequate to implement foreign policy goals. Behavioural changes could only be observed in small target countries and with modest sanction targets. Meanwhile, in addition to trade and investment bans, 'modern' sanctions target financial transactions, business activities and individuals. Therefore, from an analytical perspective, an attribution problem arises in effectiveness studies (Marten Smeets, WTO, 2018)[2]. With regard to Iran and Russia, Smeets doubts that sanctions can bring about the change from an economic perspective that is often sought through the punitive measures taken. However, economic sanctions in general cause costs in all countries involved in the sanctions. The country facing the sanctions is likely to establish trade relations with third parties that are not part of the sanctions coalition.

2) How high is the damage of sanctions for Germany?  This question has been resolved by a study that has attempted to isolate the effects of the Russian sanctions since 2014[3]. Broken down to individual countries and product categories, it compares the hypothetical development without sanctions with the weaker actual development. The difference is the trade loss due to sanctions and counter-sanctions. The European Union (EU) in turn bears 92 per cent. Germany accounted for the lion's share of the sanctioning countries' damage, with 38 per cent or 667 million US dollars in trade loss per month.

3) Are there perverse effects whereby our sanctions strengthen those in power in China, Russia, etc.? Julia Grauvogel from the GIGA Institute analyses (IPG, 2020)[4] that sanctions against authoritarian regimes like Russia pose a particular challenge. Sanctions may even prove counterproductive there and strengthen authoritarian regimes. Rulers can instrumentalise sanctions for their own purposes if they succeed in presenting the measures as an attack on the entire country. In this way, a chariot mentality can be conjured up against the common external enemy.

"Made in Germany" effects[5], meanwhile, have already been observed in China and Russia. China is now pursuing chip autonomy as a result of US sanctions, which is hurting the still-leading American chip designers and hitting global supply chains through chip shortages, such as in the automotive industry. Russia has imposed a ban on food imports as a result of US sanctions, stimulating domestic production; at the same time, food security is again a hot topic in import-dependent states.

4) How can a sanctions merry-go-round be stopped before it mutates into a military conflict? Western decision-makers are regularly confronted with the question of whether to maintain previously unsuccessful sanctions (Julia Grauvogel, IPG 2020). Therefore, it is important to think about the possible end of the measures from the beginning. It is easier to impose sanctions than to lift them again. Ending unsuccessful sanctions poses a foreign policy dilemma; it can damage the reputation of the sanctioning states. Clear predefined sanction targets may prevent such a loss of reputation.

The Greens would make their confrontational rhetoric more credible if they first clearly pointed out the human rights violations in Germany and in the Western allies. As long as their attacks remain asymmetrically directed against authoritarian emerging countries, the Greens come across as bellicose neoconservatives in foreign policy terms. They are thus (in my view) a security risk for Germany and Europe.

[1] Compare regular reports at Human Rights Watch.

[2] Marten Smeets (2018), “Can economic sanctions be effective?”, WTO Staff Working Paper, No. ERSD-2018-03.

[3] Matthieu Crozet, Julian Hinz (2020), “Friendly fire: the trade impact of the Russia sanctions and counter-sanctions”, Economic Policy, Volume 35, Issue 101, January 2020, Pages 97–146.

[4] Julia Grauvogel (2020), „Über den (Un-)Sinn von Sanktionen“, IPG Journal, 13. October.

[5] The designation of origin "Made in Germany" was introduced in Great Britain at the end of the 19th century as protection against supposedly cheap and inferior imported goods. As is well known, the stigma became a seal of quality.

Sunday, 18 April 2021

Wenn etwas leicht


Wenn etwas leicht

Wenn etwas leicht und rauschend um dich ist
wie die Glycinienpracht an dieser Mauer,
dann ist die Stunde jener Trauer,
daß du nicht reich und unerschöpflich bist.

Nicht wie die Blüte oder wie das Licht:
in Strahlen kommend, sich verwandelnd,
an ähnlichen Gebilden handelnd,
die alle nur der eine Rausch verflicht,

der eine Samt, auf dem die Dinge ruh’n
so strömend und so unzerspalten,
die Grenze zieh’n, die Stunden halten
und nichts in jener Trauer tun.

Friday, 9 April 2021

Democratic Recession in Major Emerging Countries

 “Democracy Under Siege” titled Freedom House – a US government-funded organisation (that survived the Trump reign) its latest annual “Freedom in the World” report. For the year 2020, it observed the 15th consecutive year of decline in ´global freedom´. The Freedom House annual global report is on ´political rights´ and ´civil liberties´, composed of numerical ratings and descriptive texts for 195 countries (and 15 territories). ´Political rights´ encompass three subcategories: Electoral Process; Political Pluralism and Participation; and Functioning of Government. ´Civil liberties´are defined by four subcategories: Freedom of Expression and Belief; Associational and Organizational Rights; Rule of Law; and Personal Autonomy and Individual Rights.

Table 1 provides information on how ´freedom´ has evolved during the recent period 2013-20 with overall scores for ´freedom´ and its constituents ´political freedom´and ´civil liberties´ in brackets. The period is dictated by ready (raw) data availability. And Xi Jinping became China´s President in 2013.

I have critically examined political rankings and indicators at several occasions; see here or here, notably. Nonetheless, the Freedom House indices provide some evidence on political governance, a theme that lends itself too easily to factless beliefs and insinuations. When in doubt, I prefer even political numbers over blindnesss.

Table 1: Political Freedom & Civil Liberties in Selected Emerging Countries, 2013-20











Egypt ^


















South Africa







Memo: USA



Notes: * BRICS member; ^ CwA partner.

Source: All Data, FIW 2013-2021 (Excel Download).

 Western media and politicians have focused on deteriorated political landscapes in China, Russia, Turkey – and the United States under the Trump Administration (2017-21). However, Egypt - a preferred destination of foreign capital and partner of the G20 ´Compact with Africa´ - has seen its freedom index tumble most steeply, in parallel with Turkey. Only the African giants Nigeria and South Africa have upheld freedom scores as measured by Freedom House.




Sunday, 7 March 2021

How to dispose of Corona debt

 Published on 4th March 2021 in German at MakronomMagazin

 The EU states could deal with public debt, which rose sharply in the Corona crisis, in various ways. How promising are the individual options? An analysis by Helmut Reisen.

Like other pandemics before it, the current Corona pandemic will eventually end - either "medically" or "socially". The medical end occurs when the number of people who fall ill drops sharply. The social end takes place mainly in people's minds. It occurs when the fear of the disease decreases, people no longer want to accept the restrictions - and learn to live with the disease.

The same applies to the economic policy course, which will have to deal with the aftermath of the crisis. In Germany, the public dispute about the Corona pandemic has been very poisoned for quite some time, and unfortunately this increasingly applies to economic policy debates as well. Thus, in the meantime, it seems that even invective with ad hominem attacks in the ostensibly serious daily press regarding the financing of the pandemic measures is acceptable. This article is intended to help keep a cool head in the debate by outlining the various options for dealing with the national debt.

Historical lessons

The social and economic consequences of the virus have acted as an exogenous shock on public debt. The pandemic will leave behind high public debt/GDP ratios. There is ample historical evidence to learn from: The last 150 years have provided us with enough illustrative material on how advanced nations have dealt with debt. The Great Depression of 1929-33, the world wars of the 20th century and the world financial crisis of 2007-09 were also exogenous shocks that resulted in high government debt ratios in advanced countries. The Federal Reserve's Volcker monetary shock inflated emerging market sovereign debt in the 1980s via the dollar, commodity prices and interest rates. High public debt was also endogenous in these countries, for example as a result of balance sheet currency mismatches or loss-making state-owned enterprises.

Three notable periods of public debt relief can be identified, in the decades before World War I and in the period from the end of World War II to the beginning of the 1970s. The mean value of government debt often reached around 150% of GDP before being reduced to a value of around 40%. What were the main drivers of this erosion?

  • A recent study by Eichengreen et al. describes three successful episodes of debt consolidation before World War I: Great Britain after the Napoleonic Wars, the United States in the last third of the 19th century and France in the decades before 1913. The Napoleonic Wars, the Franco-Prussian War and the US Civil War were the three most expensive military conflicts of the 19th century, resulting in debt-financed war spending. Debt relief after these wars was carried out in all three states primarily through primary surpluses in view of positive interest rate-growth differentials (interest rates were higher than growth).
  • After the Second World War, debt ratios in the developed economies fell rapidly. They reached the pre-World War I level in the 1960s. However, this was primarily caused not by budget surpluses but by the rapid expansion of nominal GDP. The post-war boom had various labels: Erhard's "economic miracle years" in Germany, "Les Trente Glorieuses" in France, "Il Boom Economico" in Italy. In the case of Germany, the debt cancellations of 1948 and 1953 by the Allied victorious powers also depressed the debt ratio.
  • Towards the end of the 20th century, public debt ratios in the poorest countries fell rapidly and initially remained at a fairly low level. The main reason for this was the HIPC initiative of the Bretton Woods sisters in 1996 in favour of mostly African low-income countries. These had not benefited from the Brady Plan of 1989, which had mainly provided debt relief to Latin American emerging countries.

Today, after a year of the Covid pandemic, the Maastricht criterion of a 60% ceiling for the debt-to-GDP ratio is being blatantly missed, especially in Latin Europe. How can the highly indebted EU states get off their Covid debt? And: does that even make sense with the current interest "costs", which are close to or occasionally below zero?

Debt dynamics

Public debt as a percentage of GDP only declines if nominal GDP growth exceeds interest and is not compensated by the interest-adjusted budget deficit (primary deficit). In the (first) Covid year 2020, the public debt ratio skyrocketed despite massive EU support, especially in Latin Europe, which suffered additionally from the loss of tourism.

The purchase of government bonds by the ECB and the national central banks is thus broadly equivalent to debt relief for the state

In 2020, the ratio of growth to interest rates was naturally unfavourable due to the covid recession. But if the euro countries recover economically in the current year, this relationship will be reversed. On the one hand, market interest rates are currently still negative or very low, on the other hand, governments de facto no longer have to pay interest on their outstanding bonds held by the Eurosystem: The government pays interest to the central bank, which now holds the bonds, but the central bank usually returns this interest income to the government. So the purchase of government bonds by the ECB and the national central banks is broadly equivalent to debt relief for the government.

Debt relief

Led by Thomas Piketty, over 100 economists have proposed debt relief. They argue that this would allow governments to issue new debt unencumbered by old debt to finance major projects. In doing so, the signatories also refer to the London Debt Agreement of 1953, a radical plan to cancel half of Germany's foreign debt and create generous repayment terms for the remaining debt. The agreement boosted Germany's economic growth by creating fiscal space for public investment, lowering borrowing costs and stabilising inflation.

However, the idea that a selective default on the debt held by the ECB would be without consequences is unrealistic. Such a decision would at least have the effect of closing the umbrella offered by the ECB today and increasing the cost of re-leveraging or refinancing the remaining debt. Debt relief limited to individual countries is also ruled out because of the immediate contagion effects. Finally, from a purely accounting point of view, the benefit of repudiation would be zero in the short term: after all, the debt repurchased by the ECB was acquired by the central banks of the Eurosystem, which on-lend the proceeds accruing to it to their finance ministers.


As long as the ECB sticks to the inflation target of 2% (and does not allow medium-term overshoots), it must reduce base money M0 if it misses the target. The ECB sells either government bonds or its own interest-bearing bonds, thus taking back the seigniorage it granted the government when it bought the bonds.

It would be different if the ECB allowed more inflation in the future, i.e. did not counteract it when inflation was above 2%. Then it would not have to sell the bonds (or issue its own bonds). In this case, higher inflation would reduce the real value of government debt that is not on the central bank's balance sheet and that has been issued at very low interest rates in recent years. Governments would win first, while private bondholders would have to "pay" for the higher inflation. Nominal interest rates would rise, lowering the price of the long-term government bonds that these investors bought at negative or zero interest rates. The inflationary surprise loss would subsequently make government bond financing more difficult and more expensive. In addition, tax revenues could fall in real terms when inflation is high as a result of the so-called Tanzi effect.

Financial repression

Carmen Reinhart and Bélen Sbrancia have shown in a widely acclaimed study how governments could get rid of their debt burdens by means of financial repression. Financial repression, like a tax on bondholders and savers through negative or below-market real interest rates, reduces government debt. It is most successful in liquidating debt when accompanied by moderate inflation.

After World War II, capital controls and regulatory restrictions created compulsory buyers of government debt and limited the erosion of the tax base. From 1945 to 1980, interest rates in advanced countries were negative about half the time - so savers paid on top when they lent money to the government. Britain and the United States liquidated debts averaging 3 to 4% of GDP annually as a result. In Australia and Italy, where inflation was particularly high, liquidation rates averaged more than 5%. Average annual savings in interest expenditure for a sample of twelve countries range from about 1% to 5% of GDP for the entire period 1945-80.

However, the fiscal yield of financial repression will be lower today in the Eurozone than it was then. Even Greece was able to sell an eight times oversubscribed ten-year government bond to investors at 0.8% just a few weeks ago. In addition, 80% of Greek government debt is held by public creditors such as the Euro Stability Fund (ESM). As part of the Pandemic Emergency Purchase Programme (PEPP), the ECB is also buying Greek government bonds, despite the securities being classified as non-investment grade.


The key determinant of future debt stability is the ratio of interest rates to growth, more specifically the average cost of debt minus nominal GDP growth. This interest-growth differential is the black box of debt dynamics: countries where nominal GDP grows at a rate identical to the average cost of debt can stabilise the debt-to-GDP ratio by maintaining a balanced primary budget. States whose GDP in nominal local currency grows faster than the average cost of debt can stabilise debt by running a primary budget deficit (the size of this debt-stabilising primary balance or DSPB is determined by the level of debt relative to GDP in the previous year and the difference between interest and growth). In contrast, countries that pay more on their debt than nominal GDP grows must run primary surpluses to stabilise the debt-to-GDP ratio.

The interest rate-growth differential is the ´black box´ of debt dynamics

Using a historical database of average effective government borrowing costs for 55 countries over a period of up to 200 years, Paolo Mauro and Jing Zhou documented in an IMF study that negative interest rate-growth differentials occurred more frequently in both advanced and emerging market economies and often persist over long historical periods. In such periods, the debt ratio erodes with comparatively little fiscal discipline.

At the IMF, such a result cannot simply be left standing. Therefore, Mauro and Zhou point to the low information content of average interest costs: the default history of sovereigns shows that after longer periods of low differentials based on average effective interest rates, marginal borrowing costs can suddenly and sharply increase and countries can be excluded from the financial markets in the short term.  And even if interest rates are quite low, this does not mean that there is a fiscal free lunch in dynamically efficient countries, as Ricardo Reis, currently much respected among "fiscal hawks", argues. The label "dynamic efficiency" does not apply to Germany, as the Federal Republic saves too much at the expense of current generations and produces high current account surpluses.

The Maastricht criterion has lost all credibility and thus binding after the Covid pandemic

The following table gives an impression of the scope of the task: The "debt ratio stable primary budget position" (DSPB) reflects the calculations of the rating agency S&P for the necessary primary budget of the countries to avoid a further increase in the respective debt ratios until 2023.* In Belgium, France, Italy and Spain, the primary balance would have to increase by more than 10 percentage points of GDP compared to the negative balance of 2020 in order to consolidate the budget in this way. The interest-adjusted primary budget will have to come down from the negative balance of 2020 at the latest after the end of the pandemic. In principle, this can only be done by increasing tax revenues or cutting spending, whereby an increase in tax rates can be just as counterproductive in fiscal terms as spending cuts are harmful in terms of growth policy, even if the EU's reconstruction fund, financed for the first time by common European bonds, will cushion some hardships.

The shortcoming of such calculations of debt dynamics is, among other things, that a higher debt ratio requires a lower primary surplus; therefore, according to S&P, Greece would manage with less austerity. The last column therefore shows my calculations of how many years it would take to squeeze government debt back below the Maastricht criterion of 60% at S&P's projected interest rate differentials to growth. In some cases, it would take several generations.

Parameters of debt dynamics in some EU countries (2020)




DSPB* 2023
































Median Eurozone





Memo: Germany





*Debt ratio stable primary budgetary position (DSPB) until 2023. R=(D/Y)/0.6. **"Years to Maastricht" calculated from J=-(ln R/(g-i,%)). Sources : own calculations; S&P Global (2021), Sizing Sovereign Debt and the Great Fiscal Unwind

Because of many uncertainties, precise figures are less important here than the message: the Maastricht criterion has, in my view, lost all credibility and thus commitment after the Covid pandemic.

Perpetual debt

Among others, George Soros or Guy Verhoefstadt have recently called for the issuance of perpetual bonds, also called consols or perpetuals. These have an infinite maturity and pay an annual coupon. Their principal is never repaid. The main argument for issuing perpetual bonds is that the EU should take advantage of the low interest rate environment to lock in low interest rates through perpetual bonds. Perpetual bonds are also not subject to refinancing risk as they never need to be rolled over.

Would perpetual bonds be a low-cost repository solution? Given today's very low yields, it may be worthwhile for issuers to take on long-term debt at favourable conditions. But financial mathematicians are rather unimpressed . With a positive yield, a perpetual bond is a comparatively expensive source of funding compared to issuing ten-year bonds, which currently trade at rates below 0%. The yield is the average interest rate over all coupon terms, weighted by the present value of each interest coupon. However, it is difficult to make this calculation for a perpetual bond because we cannot observe interest rates to infinity. The ECB yield curve stops at 30 years because there are few bonds with a maturity longer than 30 years.

Yield curve of Eurosystem government bonds

Source: ECB

The well-rated Republic of Austria (S&P rating: AA+) is a pioneer in Euroland for government bonds with extremely long maturities. It issued a 100-year bond with a coupon of 2.1% in 2017 and increased it to six billion euros in 2019. Currently, the yield is just below one per cent.  The 51-year bond with a coupon of 0.5% of the less well-rated France (S&P: AA) currently yields similarly high. The question is above all who will want to invest in such long-dated bonds when yields rise at the long end.

There is no such thing as a 'jack of all trades', but any variant will produce winners and losers, whether they are governments, their taxpayers or bondholders.

Currently, there is a high demand for these ultra-long maturity bonds, so their monetisation by the Eurosystem is not necessary. Why? Institutional investors or endowment funds usually use long-dated bonds to extend the maturity of their bond portfolios. The addition on their asset side helps them to reflect the maturity structure of their obligations (liabilities). Austria, like many other developed countries, is considered low-risk, so investing in the 100-year bond will at least give investors a positive long-term return - in contrast, many shorter-dated government bonds in Europe currently have negative returns.  Bonds with ultra-long durations also benefit from "positive convexity": if investors own long-dated bonds with low coupons (low payouts), their purchase price increases more when yields fall. Conversely, when yields rise, investors benefit from an implicit asymmetry of highly convex bonds. Indeed, the price of a bond with high convexity falls less when yields rise than it rises when yields fall.

Every variant has winners and losers

And the moral of the story? The multitude of historical examples of debt consolidation today inform us about different options: with and without austerity, with and without (de facto) debt repudiation, with and without financial repression or inflation. Surely, combinations of different variants are also possible, which allows policymakers to pursue the strategy of consolidating or disposing of high pandemic debt with multiple instruments.

It should also have become clear that there is no such thing as a 'jack-of-all-trades', but that each variant will produce winners and losers, whether they are governments, their taxpayers or bondholders. Who wins or loses exactly how much and when must ultimately be decided in the democratic process. For the selection and weighting of these options is the responsibility of neither economists nor journalists, but parliaments, governments and their voters, who should be as well informed as possible about the consequences of these decisions.