In the 1980s the US public debt has grown rapidly and raised questions about the sustainability of deficits. The same issue has been raised in Europe where debt management is a topic of considerable concern today. While in Germany fiscal retrenchment was the result of a fiscally conservative philosophy, in other countries the debt issue has moved to the forefront because debts were reaching perilous levels. Belgium, Ireland and Italy all have ratios of debt to GDP of 100% or more and Greece is rapidly getting there. Debt service absorbs a significant share of government revenue in these countries, and shocks to real interest rates or to economic growth threaten to launch debt-income ratios onto an explosive path.

This introductory chapter spells out some of the issues and then offers a preview of the papers in this collection.

A brief tour of debts and deficits

Table 1.1 shows the evolution of debts in the 1980s. Every country, with the exception of Luxemburg and the UK, had higher debt ratios at the end of the decade than at the beginning. The reason for the generalized increase in indebtedness are three:

– The sharp increase in real interest rates, in many cases a shift from negative to positive rates. When in the early 1980s the US shifted to a sharply anti-inflationary monetary stance and other countries joined, in part to avoid even further dollar appreciation and imported inflation, world real interest rates turned sharply positive.