Public Debt and its Sustainability: Literature Analysis

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The global financial crisis of 2008 triggered a shockwave of sudden awareness amongst all who were able to jump the metaphorical sinking ship in time. Others weren’t as lucky; Lehman Brothers sunk with a bang of almost $US 800billion and shocked the world quite literally.

The victims of this shock tried coping with a plethora of different strategies. Amongst these strategies are debt related financial coping mechanisms. Thorough literature analysis has shown trends regarding a rise in debt bearing, fiscal buffer for times of need, public debt-to-GDP ratio, Matesanz and Ortegas’, (2015) work about a clustering debt-to-GDP ratios of the EMU-states inspired Austria and Germany being chosen as the centre of this paper about public debt and its’ sustainability. Reinhart and Rogoffs’, (2010) work seems to have influenced a lot of the pertinent work on the over-all subject of debt-to-GDP ratio, as it is cited in most of the literature analysed for this paper. The cause for this is at hand; the authors defined a debt-to-GDP ratio threshold which struck a lot of debate. Debate, regarding the thought whether this limit of 90% is set high enough or even too low. Lastly, Dreger and Reimers, (2013) cover similar topics as the other afore mentioned papers but with the twist of relating possible problems to the EU-membership all together.

The paper is structured such, as to portrait a continuous train of thought throughout; regarding the topic of public debt and its’ sustainability in an effort to answer the question, “How sustainable are debt-based economic growth policies?”.

For this, the paper starts with a short chapter containing definitions taken from pertinent literature, then continues with a thorough literature analysis, and ultimately fades out with a look on recent data and a concluding chapter.

Definitions in Literature Analysis

For the scope of this paper certain terms need to be defined. As sources for these definitions, scientific works, mainly the ones used in this paper for the literature analysis, shall serve the purpose. Ramona Andreea Teicâ’s work from 2012 especially provides a framework for the following; as it focuses on the same general cornerstones, as this paper – only, in Romania. Additionally, the content of MCI course “Fundamentals of Economy” shall serve as a resource of proper definitions.

Sustainability requires a general liquidity of a government at a given point in time. For this liquidity to be present at any given time it is therefore, necessary that investments and the accumulation of debt-related issues is done in a responsible manner. Liquidity is an important parameter, as it presents an economy with the ability to quickly react to different requirements of the market at any given point in time. As short-term manoeuvrability is but one aspect of sustainability it is just as vital to keep long-term goals in mind. This includes but is not limited to investment decisions and budgetary plans for the future.

Public debt or sovereign debt are terms and effects used to describe fiscal policies. These effects aim to aid the private sector in financial crises, build infrastructure, and enable other publicly beneficial endeavours by either higher spending or tax reduction.

Economic growth is particularly measured in a raise of GDP of a respective country and observed over a certain period of time. This growth can be achieved via debt financing policies through the government; a limiting factor to this statement is that Keynesian policies are dependent on multiplicative factors greater than one.

Literature Analysis

According to DiPeitro and Anoruo (2012) public debt is on a rising trend globally. Indication for this trend can be found in the former, worlds’ biggest creditors’, the USA, recent indebtedness. The authors of the work 'Government size, public debt and real economic growth: a panel analysis' see the main reason for this trend, especially in regard to the USA, in an unproportionate correlation between governmental size and public debt and therefore, hindering real economic growth. Moreover, DiPeitro and Anoruo (2012) identify an effect that potentially bares the danger of negatively impacting growth. According to them, this effect occurs on the verge, where ineffective bureaucracy and heightened dependency on governmental intervention outweigh beneficial administrative acts such as legislative-, executive-undertakings, provision of infrastructural means and public goods the likes of water and electricity. The key-word and relevance for the scope of this paper, especially regarding well established countries, such as Austria or Germany, is bureaucracy. Both countries play important roles in the EU and both have tendencies of relying on rather inert administrative machineries. DiPeitro and Anoruo (2012) suggest the establishment of a regulatory organ within the government, while still invoking awareness to clearly distinguish between growth-hindering factors of governmental intervention and possible positive effects such as, political stabilization.

The work by Batini, Melina, and Villa (2018) focuses on the European Fiscal Union and is relevant for the scope of this paper, as it narrows the observed area further down from a global general view, to the EU. The core findings of the work “Fiscal buffers, private debt, and recession: The good, the bad and the ugly” show an unproportionate correlation between private and public debt in the context of recessions. The authors state that public debt will not cause as deep of a recession, as private debt unless public debt reaches extreme values. Furthermore, stating that unwarranted explosions of indebtedness in the private sector are detrimental to a respective economy. In this case the term respective economy is referring to the Euro Area in showing that the more critical heights a public debt reaches, the more prone a country is, to fall into a deeper recession in comparison. According to the authors, this is especially true with the comparison and interconnection between private and public debt. Batini et al. (2018) argue that a countries’ endeavour to save private enterprises with public funds makes the respective country more vulnerable to the effects of a financial crisis than the very same country entering said crisis with a high level of public debt. Additionally, they argue the reason for this lies within a financial buffer. This buffer translates to the logic that a policy of public endorsement of private economic players leads to harsher cuts of this endorsement in case of a crisis; since furthering such a policy in times of need could potentially start a vicious cycle of driving interest levels in unreached heights accordingly. The mentioned buffer concretely refers to the ability of a public authority to stay financially agile with the prospect of being able to borrow money themselves in times of need (for example to save a bank).

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The authors Brida, Gómez, and Seijas, (2017) dedicated their work to showing hints at a negative correlation of economic growth and public debt again focusing on the Euro Area. In terms of methodology, their paper uses the debt-to-GDP ratio as indication for the afore mentioned negative correlation. The idea dates back to a paper by Reinhart and Rogoff, (2010) who stated that there is a tolerance of 90% debt-to-GDP ratio after which respective countries significantly lower their capacity for growth. This basic idea of relating debt to GDP intuitively leads to the realization that there are fundamental problems arising out of too radical growth policies. However, one main point of critique is Reinhart and Rogoffs’, (2010) statement of a generalized tolerance level of the debt-to-GDP ratio for all countries, concluding at 90%. For this reason, Brida et al., (2017) postulated a clustering model which aims to correlate the debt-to-GDP ratios of certain EU countries, including Austria and Germany. Their main focus herein ley in clustering certain periods in time and relating these periods to Reinhart and Rogoffs’, (2010) threshold, by introducing “regimes” that represent extreme points in the mathematical foundation. Furthermore, these extreme points lead to an intuitive model of financial behaviourisms grouped into three categories; namely, “high, mid and low indebted countries” as stated by Brida et al., (2017). Empirical findings show that Austria and Germany never exceeded the tolerance level of 90%, as postulated by Reinhart and Rogoff, (2010) and are therefore, clustered in regimes one and two depending on the time period. Although this prospect seems sound in nature, other scientific works imply a need for action. Amongst such works is D’Erasmos’ et al., (2016) “What is a Sustainable Public Debt?”. This chapter in the “Handbook of Macroeconomics” aims to raise awareness of fiscal policies’ influence and its’ aftermaths.

Also claiming gentler consequences for Austria and Germany (amongst others) resulting from the 2008 financial crisis with regard to public debt, Matesanz and Ortega, (2015) aim to show a different prospect of public debt, yet still demonstrating a connection between public debt and GDP. This different prospect is an interconnection between the debt-related policies of countries in certain regions; the authors call this “synchronization” – implying, if one country in a certain area applies a specific debt-policy, others have a tendency to do the same. In a similar fashion, an effect of contagion might arise within countries that apply or applied financial strategies that are susceptible to at least partial failure during a crisis such as the last one from 2008. Moreover, additional indication for a relation between public debt and GDP is presented. In slight contrast to other, afore mentioned, scientific works, Austria and Germany end up being clustered into different groups. This implies that public debt-to-GDP evolutions comparing Austria and Germany are not as similar according to this study. In the time leading up to the crisis and with regard to their respective debt-to-GDP ratios, Austria was clustered with Italy, Ireland, Belgium, and Hungary; whereas Germany was clustered with Czech Republic, Poland, and Lithuania. In the aftermath of the crisis Austria is clustered with France, Slovakia, and Luxembourg; whereas Germany is clustered with Sweden, Finland, and Greece. This implies comparable debt-to-GDP ratios with similar debt related coping mechanisms within the groups, leading up to those ratios in 20013.

With her work “Analysis of the public debt sustainability in the Economic and Monetary Union”, Teicâ, (2012) aimed to show how sustainable the issue of public debt in the Euro Area is. As other scientific papers, she also sees the trend of a rise in public debt amongst the EU member states and further confirms this by touching the afore mentioned paper by Reinhart and Rogoff, (2010).

Dreger and Reimers, (2013) set out to answer the question whether “Euro Area membership affects the relation between GDP and public debt”. According to their findings, numerous sources name a harmful threshold for debt-to-GDP ratio with regard to growth, at 67-90%; amongst these sources, yet again, Reinhart and Rogoff, (2010) appear – also, another study, conducted by Chang and Chiang, (2009), found a U-shaped correlation. Chang and Chiang stated that the debt-to-GDP ratio bears a constructive effect on growth anyways but with more outstanding results in middle thresholds and less noteworthy ones in peripheral areas of the “U”. In complete compliance with the contents of MCI course “Fundamentals of Economics”, Dreger and Reimers find that strategies of public spending or favourable tax-policies for the private sector will lead to higher rates of public demand and therefore, result in a positive effect on the respective economy. However, the authors also call for the distinction between sustainability and non-sustainability in this context. They see the main reason for this in public debt, on the long run, only being able to fall if taxes are raised and public spending is lowered. Empirical findings are based upon data gathered between the years of 1991 and 2011 and subsequently includes the financial crisis. The main difference to other, aforementioned studies is the focus on sustainability or more specifically, non-sustainability. Noteworthy, is that in this context and observed over the course of the set time-frame, Austria’s debt levels have been non-sustainable for 50% of those years, whereas Germany’s have been non-sustainable in 70% of those years.

Concludingly, Dreger and Reimers, (2013) find that EU/EMU-membership potentially has a negative effect on the financial bearings of the respective members. Possible reasons for this danger my ley in the Maastricht standards and other important mandatories for EU-member-states.

Public Debt Development

In this chapter the paper focuses on the development of public debt levels; with main focus on the central EMU countries. Especially Austria and Germany will be the centre of the following. Pertinent literature has shown many similarities between the two countries. Because of these similarities, either one of the two would have almost been excluded from this comparison. Nonetheless, as implied by the literature, there was still enough differing empirical data to put extra emphasis on Austria and Germany. Especially, Matesanz and Ortegas’, (2015) work “Sovereign public debt crisis in Europe. A network analysis.” Delivered enough of a spark. Due to completionism, data of some other of the before mentioned EMU countries is still added.

Chosen Data points are GDP (absolute), GDP of purchasing power parity in world comparison (percent), and public debt (absolute and percent). Generally speaking, the table highlights for Austria and Germany likewise an upwards trend in GDP (absolute) and a downwards trend in public debt over the course of 2016-2018(2019). This means both countries’ measures to counteract the rippling waves of the 2008 financial crisis where fruitful in absolute terms. Relatively speaking, Austria achieved 11,18% of Germanys’ GDP in 2016 and managed to raise this number to 11,40% in 2018 at roughly 10% of Germanys’ population as can be taken from “The World Factbook” by the Central Intelligence Agency (CIA), (2018). Concerning debt, Austria had 13,76% of Germanys’ public debt level in 2016 and in comparison, 14,16% in 2018. This means that Germanys’ fiscal policies to counteract their public debt are right now more effective than Austrias’. This can be seen in a relative difference in GDP growth of 0,22% but a relative rise in public debt at 0,40% from Austrias’ perspective in the observed time frame. In other words, Germany currently does a better job at growing their GDP whilst counteracting their public debt.

Feasibility of Public Debt in the Future

The literature analysis and revision of current data has shown that public debt is a controllable parameter for Austria and Germany likewise. Both countries have strong economies and made over all wise decisions during the 2008 financial crisis and its’ aftermath. The core takeaway is that debt as a means of fiscal policy, is ever dependent on responsibility and long-term goals in mind.

The ever-present danger of bursting bubbles (real estate, housing in general, private debt etc.) and other possible financial shocks of global magnitude calls for utmost caution in any future proceedings. Said caution could appear in the form of mandatory buffers and similar regulations. Such buffers where also implied by Dreger and Reimers in their work of 2013 when they argued that such “buffers might be an appropriate strategy to compensate for extraordinary shocks”.

A different aspect that still needs to be kept in mind when making debt-related decisions is the concept of current EU/EMU regulations. Dreger and Reimers, (2013) postulated a possible correlation between EU/EMU-membership and the related Maastricht regulations (even further going: the convergence criteria). This is relevant for the topic of this paper because the afore mentioned regulations and further above-mentioned bureaucratic systems, might affect Austria and Germany in a special manner. A solution to this issue might be a Reaganesque policy of tax-relaxation for the private sector and more freedom of financial decision-making; freely, in accordance to the motto “the market will regulate itself”.


Pertinent literature shows certain trends towards a raise in public debt levels over all developed countries and the EMU members in particular in the years up to 2014-2016. After this period, the general trend seems to be falling; as can be derived from data stemming of CIAs’ Factbook. This shows two positive things: firstly, the global financial shock of 2008 seems to be slowly fading (at least in Austria and Germany) and secondly, fiscal policies are a motor for an economy in harsh times in the form of public debt and a means of a “longer leash” for the private sector in ways of not interfering with the economy in better times.

Concluding and answering the question “How sustainable are debt-based economic growth policies?”, public debt is a feasible measure of steering an economy towards the desired direction, if used responsibly. It becomes sustainable, if a few safety measures are established. Appropriate, pre-emptive buffers are an effective means of counteracting the worst effects of a financial shock, as the global financial crisis of 2008. The draw-back to such buffers is liquidity (financial manoeuvrability) and the correlating effect of being potentially less attractive for foreign investors or being granted a credit.

Concerning regulations such as the Maastricht contract, especially as they fundamentally facilitate responsible financial behaviourism, extreme situations often deem equally radical measures. Therefore, one solution to this issue might be loosening these regulations in times of need – even in a manner of giving back competencies of individual decisive power, to the degree of temporarily freeing a troubled economy of its’ legal bindings to EU/EMU regulations. Of course, here are limitations as well – namely, in the form of too far reaching degrees of freedom might leading to non-apparent long-term issues and counterproductive streams for the EU/EMU as a whole. The network-effect of clustered economies as postulated by Matesanz and Ortega, (2015) shows that there are underlying effects between geographically differing, yet economically related governments. Free-riding effects are among the most obvious in the EU and its’ structures; therefore, these are also apparent issues that might arise from wrong cluster-/network related formations. To answer the question of this paper, how debt-based economic growth policies are sustainable: they are, as long as the worst-case scenarios are being thoroughly accounted for.


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  2. Central Intelligence Agency, (2018). Germany. “In The world factbook.” Retrieved from
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  4. Christian Dreger, Hans-Eggert Reimers, (2013, August 22). “Does euro area membership affect the relation between GDP growth and public debt?” Retrieved from
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  12. William R. DiPeitro, Emmanuel Anoruo, (2012) 'Government size, public debt and real economic growth: a panel analysis', Journal of Economic Studies, Vol. 39 Issue: 4, pp.410-419,
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