Is There a Finite Debt Accumulation Horizon in the Eurozone?

English article in the proceedings dealing with unsustainability and systemic instabilities in the Euro Area in relation to the most indebted countries in the region.

Abstract

Currently, the issue of the high indebtedness of many countries in the Euro Area is one of the most significant ones. Many quantitative studies have been created to analyse the debt sustainability. However, we argue that the results are possibly inaccurate as the environment is highly unstable. We try to further investigate the problem and contribute to the discussion by analysing debt channels which are leading to a possibly endless debt accumulation in the EMU. These are as follows: Keynesian stabilisation, strict preferences, the role of democracy and political cycles, information asymmetry and fiscal illusion, the institutional characteristics of the EMU, reputation and expectations, the current economic conditions of the countries, and future prospects, mainly the population ageing. We show that the current indebtedness is unlikely to be decreased by raising GDP growth or inflation. First, the historical averages of output growth in the EMU in the nearly last 20 years are very low, comparable only to Japan. Second, today’s environment is rather deflationary. We conclude that under the current circumstances, there is no finite debt accumulation horizon in the EMU. The situation needs to be solved by making structural changes in the Union. Political integration efforts will not be able to solve the situation and make the debt environment sustainable in the long-term.