Within this pandemic context, the use of the war simile has impacted the media. Even without an external enemy or the material devastation effects inherent to an armed conflict, a war and a pandemic may have similar economic consequences.
The high public debt is one of them. It is a load, not only for those that have originated it but also for the next generations that, either shall have to pay it or will have more restricted its capacity to invest in infrastructures and social expense. A retrospective analysis from the begging of the XX century to our days shows the main mechanisms to reduce the debt and to avoid its default.
One of those mechanisms is inflation. If the debt is in the local currency of the country, then inflation causes its automatic devaluation. However and, on the other hand, it adds an unfair corrective in the form of the impoverishment of the population and, therefore, its negative impact is higher within the disadvantaged groups and small savers. Such a situation already took place in France and Germany, where the prices got up multiplied by 100 and 300, respectively, in the period 1914-1950.In other times, the governments have had to introduce extraordinary taxes to face the debt. After World War I, some European countries (Germany, Italy, Czechoslovakia and Austria), opted, quite unsuccessfully, to levy from the citizens the necessary amount to cancel the debt, through exceptional one-time taxes with tax rates that could exceed 50% on the wealth of the richer ones.
As a consequence of World War II, France and Germany, among other countries, developed a “solidarity national tax” to face the costs of the war and the recovery, which taxed the increase of wealth and income during the time the war lasted. Japan applied an extraordinary, one-time, Wealth tax with a tax rate among 10% and 90% to reduce the debt.
In the case of the USA, the public debt upon the PIB, at the end of World War II, was the highest of its whole history, higher than the current one, and that is saying something. In 1942 it was approved the Victory Act entailing the increase of the income tax to a 94% tax rate in 1944 and the Inheritance tax rate to a maximum of 75%. As a result of the increase of the tax revenue and the high economic growth of the country, by the end of the 1980s, the debt had been reduced to one third.
On some other occasion, the creditor countries were more generous and, taking into account the difficulties involving the compliance for the debtor ones, opted to, partially or totally, write-off the debt. At the end of World War II, Germany had an enormous debt due to the loss of two armed conflicts and the war reparations to the attacked countries. By the London Debt Agreement (1953) several creditor countries led by the USA, the UK and France, with the participation of Spain and Greece, agreed to write-off 62% of the debt of Germany and offered financial and commercial aid, as well as grants through the Marshall Plan (European Recovery Program). Those measures allowed the reconstruction of Germany and to become these days one of the most export and prosperous countries of the world.
Other countries, such as Greece, have not been so lucky and, after the financial crisis of 2008, some of the most solvent states of the EU, ironically driven by Germany, not only did not write-off a euro of their debt but imposed hard adjustment policies, mostly, significant cuts on the social expense, that impoverished most of its population and provoked an economic regression of decades.
Precisely, such latter attitude is these days the one supported by the leading world organizations such as the World Bank and the International Monetary Fund (IMF): the debts must been paid although entailing hardship for the affected countries. Perhaps, for this reason, the IMF suggested to those countries, in 2013, the possibility to levy an extraordinary tax of 10% on the wealth of their citizens.
DEBT AND COVID-19
Within the current situation, we should question how would impact on the already trapped southern countries, among them Spain, the increase of the debt due to the COVID-19 crisis, since for sure it will result in an even higher debt spread with respect to the northern countries.
Given that today debt forgiveness is unimaginable and, it is not on the hands of the debtors countries to control their inflation, which is the main task of the Central European Bank (CEB), the only way out for them is to pay the debt and if they wish to avoid, as far as possible, applying exceptional taxes or unpopular adjustments (cuts), the only successful way out would come from economic growth.
For this reason, and thanks to the positive attitude of the Germans, led by Angela Merkel, it is so relevant the agreement that is being managed in the EU to create a European fund for the reconstruction, mainly addressed to those countries most economically affected by the pandemic and which includes significant non-repayable grants. Let’s see this time if we will be able to take advantage of the situation so that our economy becomes more productive and focused on sectors with good prospects.