by
Robert Cauneau
29 November 2024
The French debate on the public deficit and debt has become obsessive. Every election campaign and every budget discussion provides an opportunity to sound the alarm about a supposed financial abyss. France is reportedly facing a catastrophic, unprecedented situation. The public debt, which now stands at over €3 trillion, is presented by officials across the political spectrum as a ticking time bomb. This alarmist discourse on public debt at the Eurozone level is different from that prevailing in other countries, notably the United States and Japan, where the analyses of Warren Mosler, the leading thinker of Modern Monetary Theory (MMT), are increasingly being discussed. He shows that, given their true nature, the public deficit and debt are not only in no way problematic, but, on the contrary, are necessary for the economy to achieve its real objectives.
The French Obsession with the Deficit: A Dogmatic Legacy
Since the Maastricht Treaty in 1992, European fiscal rules have required member states to keep their deficit below 3% of GDP and their public debt below 60% of GDP. Despite their lack of economic basis, and even though their relevance is increasingly questioned, these thresholds have become dogmas. Yet they are political in nature. Indeed, Mario Draghi’s « Whatever it takes » stance in 2012 and the « whatever it costs » stance during the Covid-19 pandemic have clearly shown that the issue of public debt sustainability is not an economic issue, but essentially a political one. Fears of a sovereign debt crisis in France are therefore largely unfounded. Yet, once the crises have passed, the discourse on deficit and debt reduction immediately resurfaces.
There is no empirical evidence of a critical threshold for public debt levels
A recurring argument in debates on public debt is that there is a level of debt beyond which economic growth is threatened. However, no serious study has ever demonstrated that such a threshold exists. The famous 2010 study by Reinhart and Rogoff,1 which suggested that debt above 90% of GDP hindered growth, was largely discredited after the discovery of major methodological flaws. In fact, there are numerous historical examples showing that high levels of public debt can coexist with strong economic growth, as long as the state continues to support it. History shows that reducing public debt causes recessions.
The United States has experienced six periods of depression: in 1819, 1837, 1857, 1873, 1893, and 1929. Each of these depressions was preceded by a significant reduction in the outstanding public debt. Similarly, the public surplus that President Clinton was so proud of in the early 2000s was followed by President Bush’s recession.
The Need to Analyze Interest Amounts Differently
The amount of interest on public debt is systematically analyzed from the perspective of a burden on the state budget, with reference to the budgets of certain ministries. It is never analyzed from the perspective of its economic impact. However, to the extent that the state is a net payer of interest, this interest should be seen as contributing to the public deficit, thus supporting the economy, even if it does so in a socially regressive way, as it benefits only rentiers.
The analysis of interest allows us to understand that the public debate on debt is often biased by preconceived ideas. This is why a good understanding of how money creation works and the relationship between the state and the private sector is necessary to deconstruct the myths surrounding the public deficit and debt.2
The public deficit and debt are the counterpart of the private sector’s savings and financial wealth.
One of the overlooked points in debates on the public deficit and debt is the existence of the macroeconomic accounting identity, which is true in all countries3 and which shows that the public deficit is, to the nearest cent, the counterpart of the net savings of private sector agents. Thus, when the state spends more than it collects in taxes, i.e., when its budget is in deficit, it creates money in the economy, thereby helping to support it. Similarly, the public debt, which is the accumulation of deficits, represents, to the nearest cent, their net financial wealth.
It follows that the public debt is not composed solely of government securities. It encompasses all government liabilities, namely cash, bank reserves, and government securities. It is important to emphasize that issuing government securities does not create a new currency, but simply changes the form of the currency, moving from « reserves » to « securities, » just as an amount is transferred from a non-interest-bearing current account to an interest-bearing deposit account.
Contrary to what the simplistic analogies often used in public debate suggest, a government’s debt has nothing to do with that of a household or a business. Whereas a household must repay its debts with pre-existing resources, the government creates its own currency when it spends. And this national currency can only be created through public spending. It should be noted, however, that, in the Eurozone, euros are created by the entity represented by the consolidation of the treasury ministries of the member states and the ECB, when they spend4.
According to MMT economists, neither taxes nor government securities finance public spending.
According to the analysis of MMT economists, the government cannot default on its own currency, which it creates by spending. The process of money creation therefore begins with the government paying. According to this logic, neither taxes nor government securities finance public spending. Taxes, far from serving to fill government coffers, create a demand for domestic currency. It is because citizens must pay their taxes in euros that they accept and use this currency. As for government securities, their issuance is also not intended to finance government spending, but to maintain the target interest rate set by the European Central Bank, as well as to provide a safe financial asset.
From « Sound Finance » to « Functional Finance »
This analysis, which is in no way ideological but is the result of observing the functioning of the monetary system, leads directly to the need to rethink French budget management. Rather than focusing on deficit reduction, public decision-makers should consider the unused resources in the economy and how to mobilize them to meet social needs. This would involve moving from a « sound finance » approach to a « functional finance » approach, which would abandon the traditional vision focused on balancing public accounts, for one in which the state’s primary objective is to ensure a prosperous economy. As MMT economists emphasize, as long as full employment is not achieved, the state can use its deficit to stimulate growth and thus improve general well-being5. The real limit is not financial. It is neither the level of the deficit nor the level of the debt. It is real, that is, the availability of resources (technological, natural, and labor), hence the ineffective nature of financial constraints in the Eurozone.
Demystifying Beliefs: The Social Construction of Public Deficit and Debt
The transition to more functional budget management also involves understanding the deep-rooted beliefs that shape our perception of public deficit and debt. Indeed, as sociologist Frédéric Lebaron6 argues, drawing inspiration from Émile Durkheim, economic concepts, far from being objective truths, are social constructs resulting from interactions and power relations. Idealized notions such as the « good father » or « rigorous management » of the state perpetuate the idea that a « healthy » financial situation means the lowest possible debt, which distorts the reality of public debt. Thus, the irrational fear of debt is based on economic beliefs comparable to religious beliefs.
This belief is amplified by political and media discourse, which creates a climate of fear justifying austerity policies, with serious social consequences. In doing so, it prevents France from fully mobilizing its economic resources. In reality, far from being threats, the public deficit and debt are essential tools for supporting the economy and addressing major challenges, particularly environmental ones. It is therefore crucial to rethink these notions on rational grounds and bring a sociological perspective to the table in order to demystify these beliefs.
Conclusion: Rethinking the Way We Develop Public Policy
Thus, the fear of the public deficit and debt is based not only on a flawed analysis of the system, but also on deeply held beliefs. Yet, far from being the threats often decried, these are essential tools for supporting the economy and private wealth.
By understanding MMT, it would be possible to meet the expectations of public services, which suffer from chronic underfunding, as well as the population’s aspirations for well-being. Rather than systematically seeking to make savings, thus exacerbating an already fragile situation, MMT proposes rethinking the role of the state as a creator of wealth and engine of growth.
This paradigm shift would offer a radically new perspective on current budget discussions. The objective of budget cuts would be replaced by that of optimally mobilizing resources, with the aim of fully exploiting the country’s economic potential. This would represent a complete break with the dominant neoliberal austerity ideology.
NOTES
1. The limitations and error of Reinhart and Rogoff are analyzed in this article by Yeva S. Nersisyan and L. Randall Wray entitled « Un excès de dette publique handicape-t-il réellement la croissance ? ». On the same type of questioning, an article by Phillip Heimberger entitled « Do higher public debt levels reduce economic growth » shows that the data suggest that the econometric literature has so far not provided strong evidence of systematically negative effects of higher levels of public debt on growth.
2. In any case, it is possible to provide an effective response to the often-heard criticisms of high interest rates by suggesting a zero interest rate policy. See the article « The Natural Rate of Interest is Zero » by Warren Mosler and Mathew Forstater
3. Sectoral balances are a sectoral analytical framework for the macroeconomic analysis of national economies developed by British economist Wynne Godley
4. See the article « MMT et l’Eurozone » : https://mmt-france.org/2020/09/21/mmt-et-leurozone/
5. The recent past shows that the USA, with large public deficits, experienced stronger growth than the Eurozone, where the deficits were smaller.
6. This is an article titled « Croyance économique et croyance religieuse: quelles relations? Quelques réflexions durkheimiennes »
MMT France 