"Inside Public Debt: Ethical Arguments Against Default"

The conference was organized jointly by the ECSPC, the Walter Eucken Institut and the Department of Law and Economics of Productive Activities. The conference was sponsored by Cassa Depositi e Prestiti and énosi. Financial support came from Banca d’Italia. The conference was formally opened by Professor Giuseppe Eusepi, Vice-President of the ECSPC and conference organizer. He welcomed the conferees on behalf of the ECSPC and thanked the sponsors for their financial support. He raised some key questions for the conference; whether defaulting on public debt is ethically outrageous in principle and can be contemplated only in extreme circumstances or, following the lead of Buchanan’s treatment of the issue, seeking to be sympathetic to debt default. He clinched that Contractarian logic requires a language of debt renegotiation, not of debt default. Professor Eusepi invited Professor Lars P. Feld, Director of the Walter Eucken Institut and President of the ECSPC, to extend his welcome to the conferees. Professor Feld focused on the enormous challenges inherent in trying to cope with public debt all over the world, particularly in Southern Europe. He pointed out that the conference was a topical one, covering areas of key interest going from the relation between sovereign debt and the banking system and between central banks and the banking system. Professor Eusepi then gave the floor to Dr. Gianfranco Di Vaio, Deputy Chief Economist of Cassa Depositi e Prestiti. Dr. Di Vaio welcomed the participants and thanked for the opportunity to sponsor the event. He provided an overview of the role that Cassa Depositi e Prestiti has played for over a century and stressed that CDP’s future plan to foster research activity will have a beneficial impact on the development of national economy. Soon after, Professor Pietro Boria, on behalf of énosi and the Faculty of Law, addressed a note of appreciation to Professor Eusepi for drawing together leading scholars working on public debt and suggested that consideration be given to organize a conference together with the Ph. D. program at the Faculty of Law. Following the remarks of welcome and a cocktail reception, the conference started with a session chaired by Giuseppe Eusepi (Sapienza University of Rome). The first paper entitled “Political Obligations: Is Debt Special?” was by Geoffrey Brennan (Australian National University, Duke University, UNC). He led off by stating that the paper was built on a previous paper written jointly with Giuseppe Eusepi in 2002 in response to an earlier paper of Buchanan’s. He reminded us that to public choice 'government' is just a linguistic short-hand for the individuals that figure in the policy-making process - the bureaucrats and politicians and advisors and in a democratic system the voters, and the relations between them. However, he continued, it is problematic to attribute to those various players ethical commitments that we have little reason to think they possess. He emphasized that politicians break promises all the time. They commit in their electioneering to all kinds of extravagant policies, which they conveniently forget once they achieve office. For example, governments sign on to international agreements from which they subsequently defect. Witness the Stability and Growth Pact of the EU. It followed a stimulating analysis on the difference between campaign promises and what we might think of as policy contracts. One instance where government needs that capacity to pre-commit is in relation to debt financing. In his view, Buchanan's thought - to reduce the promises to bond-holders to the status of other kinds of specifically electoral promises - would have disastrous consequences. As an illustration of the intertemporal aspect, he made an analogy between climate change and public debt. In his view, debt is part of the solution to this problem. No one would ethically dispute the legitimate use of public debt financing to fund projects that will yield their benefits to future rather than present generations. Unfortunately, he concluded, scope to use public debt for such purposes has been compromised by the levels of debt already acquired for much more dubious purposes. Richard E. Wagner (George Mason University) discussed the paper. The session ended with a paper by Richard E. Wagner (George Mason University) entitled “Debt Default and the Limits of the Contractual Imagination: Pareto and Mosca Meet Buchanan”. Wagner gave a stimulating overview of Buchanan’s treatment of public debt. He clinched that while Buchanan strove to incorporate a contractarian orientation into the theory of public finance, when it came to public debt he pursued the contractual perspective only incompletely. He conceptualized a contract between a present and a future generation but not a multi-sided contract that created a complex web of contractual relationships. He then went on to argue that Buchanan wrote in support of the morality of debt default. However, what seemed strange for such a notable contractarian was not so strange when thinking of the conflictual formulations that Gaetano Mosca and Vilfredo Pareto introduced into economic sociology. Bruno S. Frey (University of Basel and CREMA) discussed the paper. On Tuesday, May 31st, there were morning and afternoon sessions. The opening session, chaired by Lars P. Feld (Walter Eucken Institut and Albert-Ludwigs-Universität), started with a paper by Giuseppe Eusepi (Sapienza University of Rome) and Richard E. Wagner (George Mason University) entitled "De Viti de Marco vs. Ricardo on Public Debt: Self Extinction or Default?". Giuseppe Eusepi presented the paper. He argued that Antonio de Viti de Marco’s theory of public debt contains a puzzle that is in full force today. He clinched that while, as a purely formal matter, de Viti accepted Ricardo’s proposition that an extraordinary tax and a public loan are equivalent, he reasoned wholly differently than did Ricardo. He went on by contrasting Ricardo's reasoning in terms of macro aggregates with de Viti's reasoning in individualistic or contractarian terms. He highlighted that within de Viti's cooperative state public debt would be self-extinguishing. In this framework public debt is viewed within the private law logic of contractual obligation. Outside this model, democratic processes will entail competition among élites for positions of rulership and public debt can become one more means by which the members of politically dominant groups can pass cost onto the remainder of society. He noted that such Italian theorists as Mosca and Pareto thought in terms of a continual circulation among élites striving for power, hence default can become a genuine possibility. Karsten Mause (University of Münster) commented on the paper. In the second paper, “Debt Default and the Relationship of Citizens to the State" Bruno Frey (University of Basel & CREMA) argued that debt default is an explicit promise broken by government undermining the Rule of Law. He pointed out that debt default produces two major consequences: market reaction in the form of high interest rates and a worsening of the social system. Stefano Gorini (Tor Vergata University of Rome) discussed the paper. After a refreshment break, the second morning session started with a paper by Giuseppe Vitaletti (Tuscia University) entitled “Raising Public Debt, Structural Reduction of Interest, End of the Economic Crisis”. He started by arguing that public debt is usually faced as it were the evil of the economy. He distanced himself from this position and showed that in advanced economies net investments tend to zero due to declining fertility rates and a huge growth of the service sector vis à vis the industrial sector. He stressed that an excess of private savings over investments created the conditions for resorting to debt. In support of his position, he emphasized that countries with a high public debt ratio, like Japan, are those less affected by the global crisis. He presented a wealth of data to corroborate his view. Jan Schnellenbach (Brandenburg University of Technology Cottbus–Senftenberg) discussed the paper. It followed a paper by Lars P. Feld and Christian Pfeil (Walter Eucken Institut and Albert-Ludwigs-Universität) entitled “Does the Swiss Debt Brake Induce Sound Federal Finances? A Synthetic Control Analysis”. He argued that the Swiss debt brake is widely appreciated for some of its features and it was thus also discussed in the debates as blue print for fiscal rules in Germany, the European Union member states and Israel. He raised some doubts regarding this rule and the presentation revolved around the effectiveness of the Swiss debt brake by employing the Synthetic Control Method. The introduction of this fiscal rule improved the budget balance by about 3.6 percentage points on average in a post-intervention period covering five years. The paper was discussed by Geoffrey Brennan (Australian National University, Duke University, UNC) The afternoon session started with a paper by Friedrich Schneider (University of Linz), Raphael N. Markellos (University of East Anglia), Dimitris Psychoyios (University of Piraeus) entitled “Public Debt and the Shadow Economy: What Relationship Do We Observe?” Friedrich Schneider presented the paper. The paper revolved around the role of the informal sector in the official economy of 64 countries between 2003 and 2007 to see its impact on debt markets. Through the use of an ordered probit regression, he showed that the informal sector has significant adverse effects on credit ratings and lending costs. He pointed out that the research evidenced some policy implications especially in the context of the ongoing sovereign debt crisis. Lars P. Feld (Walter Eucken Institut and Albert-Ludwigs-Universität) discussed the paper. The second paper was by Stefano Gorini (Tor Vergata University of Rome) who presented a paper written jointly with Laura Castellucci (Tor Vergata University of Rome) entitled “High Equity and Efficiency Costs of Debt. Balancing Austerity and Monetization for Debt Stabilization and Recovery”. The paper examined the consequences of a policy of permanent deficit spending and the related debt accumulation. Gorini presented a graphical long-run dynamic analysis showing that a permanent deficit spending always entails an income redistribution from future generations to the present one. He finally pointed out that, due to the devastating impact of austerity under recession, the only way to achieve debt stabilization and recovery is to gradually monetize it. Andrea Rieck (Federal Ministry of Finance, Germany) discussed the paper. The second afternoon session was chaired by Bruno S. Frey (University of Basel and CREMA). Andrea Rieck (Federal Ministry of Finance, Germany) presented a paper written jointly with Ludger Schuknecht (Chief Economist and Director-General, Federal Ministry of Finance, Germany) entitled “Preserving Government Solvency: a Global Policy Perspective”. She led off by arguing that unhealthy debt dynamics have potentially developed to a systemic dimension in both advanced and developing countries. She presented the different approaches to debt overhangs that have accumulated over time and concluded that strong rules and institutions, clear accountability and credible enforcement procedures are the necessary ingredients for market discipline. In her discussion, Rieck clinched that debt default is unethical and pointed to the role played by a contractual approach in dealing with country insolvency. Jan Schnellenbach (Brandenburg University of Technology Cottbus–Senftenberg) discussed the paper. The last paper “Governing the Market for Sovereign Bailouts” was delivered by Karsten Mause (University of Münster). He discussed the relatively neglected issue of how to regulate the “supply side” of the market for sovereign bailouts and wondered whether it should be left to the discretion of potential rescuers such as the governments of jurisdictions or the governing boards of central banks, or should there be constitutional rules that regulate the supply of sovereign bailouts by defining specific conditions under which a potential rescuer is allowed to offer a bailout. Andrea Rieck (Federal Ministry of Finance, Germany) discussed the paper. On Wednesday June 1st, there were only morning sessions. The first session was chaired by Friedrich Schneider (University of Linz). Fabrizio Balassone (Bank of Italy, Directorate General for Economics, Statistics and Research) opened the session with a paper entitled “Economic Governance in the Euro Area: Balancing Risk Reduction and Risk Sharing” written jointly with Sara Cecchetti, Martina Cecioni, Marika Cioffi, Wanda Cornacchia, Flavia Corneli and Gabriele Semeraro (Bank of Italy, Directorate General for Economics, Statistics and Research). After illustrating the different postures to the sovereign debt crisis, Balassone discussed the pros and cons of introducing cooperative mechanisms for debt reduction in the euro area and the related issue of a common fiscal capacity. His presentation provided a wealth of empirical evidence of how the EU is pressured by exceptional economic and geopolitical circumstances. He concluded that unless deeper reforms are introduced, the EU risks pro-cyclical excesses. Florin Dragu (Financial Stability Department, National Bank of Romania) discussed the paper. It followed a paper by Liviu Voinea, Florin Dragu, Alexie Alupoaiei, Florian Neagu (Financial Stability Department, National Bank of Romania) entitled “Adjustments in the Balance Sheets – Is it Normal This “New Normal”?” The paper was presented by Florin Dragu. He argued that the adjustments in the balance sheets are the “new normal” after the burst of the financial crisis. He emphasized that a high level of indebtedness among companies and households calls for a debt re-adjustment towards more sustainable levels. He presented data on six distinct debt categories and on gross domestic product dynamics by using a series of panel regressions in order to assess the effect of debt on economic growth. He concluded that a too restrictive threshold in a country which can support higher debt values can lead to opportunity costs through missed investment possibilities. Conversely, setting a threshold above the one which can be afforded may also have negative effects on economic growth. Ernesto Longobardi (Aldo Moro University of Bari) discussed the paper. The conference closed with a session chaired by Giuseppe Eusepi (Sapienza University of Rome). Ernesto Longobardi (Aldo Moro University of Bari) presented a paper written jointly with Antonio Pedone (Sapienza University of Rome) entitled “On Some Recent Proposals of Public Debt Restructuring in the Eurozone”. After an examination of key issues surrounding sovereign debts in the Eurozone, Longobardi focused on the different possible strategies to be enacted to reduce the public debt-GDP ratio without resorting to debt restructuring. He provided a survey of the various postures to debt restructuring and scrutinized the implications of debt renegotiation. Friedrich Schneider (University of Linz) discussed the paper. Professor Giuseppe Eusepi closed the conference with a note of appreciation for the high quality of the papers and the lively and informed comments that contributed to provide valuable insights into the ongoing debate surrounding the ethics of default on debt. He, then, expressed his appreciation to Maria Delle Grotti, secretary to the ECSPC, for her untiring efforts in preparing the conference and Stefano Sansone for setting up the ECSPC conference website. Finally, he expressed his gratitude to Cassa Depositi e Prestiti and énosi for their financial support. The conference closed at 12:30 p.m. with a resounding applause. Rome, July 29, 2016. Giuseppe Eusepi (Vice-President ECSPC)