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Online seminar – Low interest rates: a licence to accumulate (public) debt?

Today, the interest rates (both real and nominal) in the Euro area are negative or ultra-low, even for long maturities. While real rates have been low in past occasions, it is the low level of nominal rates that is unprecedented. Conventional wisdom is that such low rates favour higher deficits; yet, the argument is much weaker than it appears at first sight.

In the first online seminar in 2020 organised by the Florence School of Banking and Finance, Daniel Gros (Director of the Brussels-based think tank CEPS, Centre for European Policy Studies) discussed two key issues in the current scenario.

The first is the question whether low rates imply also low costs and low risks. Indeed, the effective cost of public debt remains higher than present rates would suggest. Furthermore, Dr. Gros explained how the marginal cost of additional debt is today much higher than the interest rate for highly indebted countries.

The second element discussed is the interplay between monetary and fiscal policy, focusing particularly on the European Central Banks’ sovereign bond purchase program (PSPP) which might have increased the risk for private investors thus making additional debt more expensive. Additionally, Dr. Gros argued that fiscal policy cannot save the ECB from its low inflation conundrum. While higher deficits would have little impact on inflation (flat Phillips curves), running a fiscal surplus is equivalent to central bank bond buying.

The online seminar was closed by a traditional questions and answers session with the public.

Download the presentation by Daniel Gros